The ability to move residential and buy-to-let properties into a Sipp and claim tax relief on the assets has drawn feverish coverage in the money pages of the national press but many advisers are concerned at the potential risks of adopting such a strategy. These concerns range from the legal issues around holding property, particularly overseas property, in trust to administering properties as benefits in kind and portfolio diversification. Intelligent Pensions technical manager David Trenner says there is “fantastic scope for misselling” if the property market falls and investors’ pension funds are effectively left in negative equity. He says: “If you buy in when the market is high, then in a few years, your pension fund could potentially be in negative equity. This is arguably less of a problem if you are younger but there is fantastic scope for misselling.” Fiscal Engineers managing director Shane Mullins says the majority of investors would have to be “nuts” to hold residential property in their pension funds, especially from a diversification standpoint, unless they are very wealthy. Therein lies another problem. The rules around holding residential property in pension funds were relaxed to level the playing field between occupational and personal pensions. Whether this was designed to enable the wealthy to gain tax relief on their properties is up for debate. Indeed, commentators have said that if just 10 per cent of the 75bn BTL housing stock was transferred into Sipps, for example, the cost to the Government in tax relief would be 4bn, equivalent to a 1p on income tax. Trenner says this leads him to believe that as the cost stacks up, the Inland Revenue will revoke the tax relief, causing a headache both for advisers and their clients. He says: “The take-up of residential property in pensions may not be that high but if it is higher than expected, the Revenue will pull the plug. You used to get mortgage income relief until that was phased out in April 2000 after being red-uced throughout the 1990s. If you are going to phase out tax relief on mortgages, it does not make a lot of sense to allow it through pensions.” Sipp Provider Group director and European Pensions Management managing director Francis Moore says the cost of transferring property into a Sipp will be prohibitive for many and that is probably what the Revenue is banking on. The trustee’s reporting requirements also mean they will have to set a market value rent for the homeowner, given that the property will be trea-ted as a benefit in kind, and get regular valuations which will all add to the cost. Given that Sipp holders can only borrow 50 per cent of the assets in the pot after A-Day, they will need a substantial pile of cash to be able to buy a property, particularly in London and the South-east. Moore says pension funds will need to be even bigger than expected because, as the rules currently stand, investors will not be able to borrow the VAT charge applicable on buy to lets and commercial property on top of the existing borrowing limits. He says that, in the preA-Day environment, investors can borrow the cost of the VAT above the existing borrowing limit as long as it is repaid within 12 weeks. Although many are only able to reclaim this quarterly, the Revenue has more or less turned a blind eye to it. If the property in pensions market expands, as many predict, then the Revenue is unlikely to ignore this. Moore says: “A lot has been made of the new rules but the articles in the press are not pointing out that it is likely to be very expensive. The industry itself is much more caut-ious and it is not to say that solutions will not be found but we expect to see diversification in offerings, with layered propositions from different providers.” Mullins advocates gaining exposure to property through collectives for people without huge pension funds. His main concerns are that, given it has been relatively easy to make money from property in recent years, many investors may end up with highly geared portfolios at a time when the market is at best slowing. If some BTL property investors have a few void rental months in this time, they could hit serious financial problems. He says: “There has been a lot of fever around buying residential property but too many people are going to end up highly geared. We have been overweight in property for the last seven years but are likely to start reducing that in the next six months. The advantage of investing in commercial property collectives is that you get exposure to a diversified portfolio with strong cov-enants in place.” The interest in property shows no sign of abating, however, with providers continuing to launch property vehicles. Axa Investment Managers has just set up its UK-listed European and UK commercial property fund. Head of retail Simon Ellis says that while the Sipp market will be a driver for sales of property funds, he believes this is only as part of a wider acceptance of and interest in the need to asset allocate. He says: “Over the past two to three years, more and more people have become interes-ted in asset allocation and the request for non-correlated assets has grown and that is set to continue.” Clearly, the level of take-up of residential property in Sipps after A-Day remains to be seen but the process is far from a simple one and the longevity of the tax relief on offer is open to question. As such, many advisers feel that the majority of inv-estors will be better off investing in collectives for the yield and diversifying qualities of the asset class and a clear distinction between these two investor types will bec-ome increasingly marked after next April.