SIPP property rules least benefit to lower tax payers

The government has acknowledged that new rules allowing the purchase of property through a pension will be inappropriate for most people.

Revenue and Customs, which is in charge of bringing in the new scheme, has said this type of investment, would only be realistic for those with the largest pension pots.

The rules will come into force in April 2006. Critics have warned that there should be more publicity about the scheme to minimise the risk of mis-buying.

The new rules will allow investors who buy residential property through a Self Invested Personal Pension (SIPP) to benefit from tax relief on money paid in.

The tax relief will be as high as 40% for higher rate taxpayers who make a contribution of £60,000 into their SIPP, giving them a £100,000 fund to spend on property. Neither rental income from the property or profit from the eventual sale of the property will be liable to tax.

Property pensions are expected to increase demand in the housing market by 5%, according to figures released by financial advisers Hargreaves Lansdown.

Most people will not be able to take advantage of a SIPP to purchase property, because while a SIPP can be used as a deposit to take out a mortgage, government rules stipulate the home loan can be no more than 50% of the value of the pension.

The average pension fund in the UK is £30,000, which would allow a potential investor to borrow only £15,000 to purchase property, giving a total buying power of only £45,000, far below the average house price.