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A consumer&#39s view

The Government is finishing the year with a bang. The pre-Budget statement, although generally dull and depressing, with the

Chancellor admitting that he needs to borrow £37bn this year to balance the books, did have one or two bright spots.

Anyone saving for retirement will be delighted with the news that residential property is to become an eligible investment for a Sipp.

What has prompted this change of heart is difficult to imagine.

Until now, the Inland Revenue has fiercely opposed such a move and there is no doubt that it could push house prices even higher and provide yet another avenue for individuals to make tax-free capital gains on property. Is this really what the Chancellor intended?

Perhaps it is the general disillusionment with pension saving and the fact that the thriving buy-to-let market has so far avoided any disasters that has changed ministers&#39 minds. Either way, it will create huge demand for Sipps which is good for pension advisers.

It will be interesting to see how the mortgage lenders assess the ability to make repayments when a property is held in a Sipp.

Presumably, it will have to be based on the level of contributions made to the scheme plus the assumed rental income or some similar formula.

The new rules, yet to be formulated, will come into effect in April 2005 and will provide favourable tax advantages in respect of the rent which presumably will roll up tax-free.

The property should also be free from capital gains tax and will be outside the individual&#39s estate for IHT purposes.

Terms and conditions are as yet unknown but will be put together by the Department for Work and Pensions. The interesting thing is that rental of the property by a Sipp scheme member will be permitted but unless occupation is on commercial terms, that is, the tenant pays a full market rent, there will be a benefit in kind tax charge on the member.

However, with high house prices, only the relatively wealthy will be able to take advantage of this new concession. The proposals are that the amount of borrowing is restric-ted to 50 per cent of scheme assets as opposed to the existing 75 per cent of the cost of a commercial property.

With the average home now costing around £140,000 and much more in London and the South-east, you will need a pension fund of at least £100,000 before you can even think of investing in

residential property.

We do not know yet whe-ther there will be an overall restriction on the proportion of the fund invested in property either. It would be odd if there was no such restriction as it cannot be wise for an individual to have all their pension investment eggs in one basket.

The National Audit Office will review all these proposals during the next three months ahead of the Budget in the spring.

Meanwhile, the Chancellor has also announced that he will be looking at introducing real estate investment trusts which provide tax breaks for investors in residential property as a means of making more money available for affordable housing.

If Brown wants to avoid yet another property boom, he will have to restrict eligibility to new developments. The last thing that the housing market needs is a flood of institutional money competing for existing properties with owner-occupiers. Hopefully, the Treasury has realised this but there is no guarantee.

Anyone who can commission Kate Barker to spend eight months to tell us that the reason more houses are not built is because planning permission is difficult to obtain and there is a shortage of land in the places where people want to live must be living in another world and have money to burn.

Any builder could have told Brown that over a pint in the pub – for nothing.


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