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UK property investment: u-turn on SIPPs catches lenders unaware

7th December 2005

The UK government has decided not to allow tax relief to be given on property invested in SIPPs.

In a surprising turn of events, the UK government has reversed its decision to allow property invested in self invested personal pensions (SIPPs) immediate tax relief. While it is certainly plausible that the speculation surrounding the level of property investment in SIPPs was exaggerated, lenders will certainly have to reassess their buy-to-let strategies in the wake of the government's move.

The chancellor's pre-budget report revealed yesterday that the government has reversed its decision that investment in residential property placed in Self Invested Personal Pensions (SIPP) would be given up front tax relief. Formerly set to be introduced in April next year, pension simplification rules were to increase the scope of pension investment so that investors using a SIPP scheme could hold money in residential property, and other "alternative" investments such as fine wines or stamps.

The new rules stimulated much debate on the effects SIPPs would have on the buy-to-let market. Some believed it would have a substantial effect - Nationwide subsidiary UCB Home Loans believed that business over 2006 could amount to between GBP3 billion and GBP5 billion spent on rental property for use within pensions, with mortgages accounting for a third of this figure..

Yet even before the government's somewhat drastic move on December 5, there were reasons to believe that much of the hype surrounding property in SIPPs was unwarranted. Firstly, because property in a SIPP would not be owned by the individual, but rather by the trustees of the pension fund, making individuals wary of ceding control.

Moreover, due to the nature of rules regarding property in SIPPs, only those with large pension pots would be able to afford to include property, thus making it largely a benefit to the wealthy, rather than to the mass market. High administrative costs were also another concern that led many to believe that SIPPs would not stimulate the buy-to-let market as was supposed.

Nevertheless, notwithstanding such reservations, lenders had taken a number of steps to prepare for the incoming regulations. Indeed, a number of lenders were looking to enter (such as Alliance & Leicester) or invest more heavily into the buy-to-let sector with a view of capitalizing on potential increased interest.

These lenders will now have wasted their time and money on preparing for a regulatory change in demand that will not now materialize.

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