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Investment View: Brown woke up to tax threat

I know the Chancellor’s pre-Budget report was comprehensively covered in this august journal but I cannot let the changes to Sipp rules go unremarked.

I have been banging on about the dangers of over-egging property for some time. It would be nice to think the Chancellor reads this column and saw the error of his ways but I fear he is driven by different forces.

My concern was the concentration of portfolios into a single asset class which could be subject to contractions in value, perhaps even prolonged. You could envisage someone buying a 150,000 property for just 60,000 down – 100,000 into a Sipp, tax relief of 40,000, borrowing of 50,000 (as allowed in the new rules) and, bingo! Including a property in a pension fund worth more than double the down- payment was possible.

The element of gearing added to the risk. Heavily weighting a pension fund into a single asset class is dangerous, even more so when gearing is involved, but this is not what drove the Chancellor to change his mind.

Arguably, the lobbying of some sectors of the community on how a rush to buy second homes could make getting on the first rung in the property ladder even more difficult weighed with Mr Brown but the real driver was almost certainly the potential loss of revenue to the Exchequer. Not only are there entry tax breaks for pension fund investors, but making holiday homes free of capital gains tax or allowing your personal residence to drop out of the inheritance tax net could have cost the revenue billions of pounds – and by and large it would have benefited just the wealthier in society.

The rules are still not clear so no doubt the debate over what can and cannot be included will continue. Still, it was nice of the Chancellor to fire the starting gun on real estate investment trusts, widening the property options for investors. Even here, we are short of real detail. Reits have been on the cards for some time. They exist overseas, but such are the tax complexities of converting property companies into investment trusts that the Treasury has clearly fought shy of coming up with a proposal. It is now on notice so to do. Given the demand shown for recent property trust issues, it is not before time.

No doubt, there will be residential property funds targeting investors which could be a more appropriate way of achieving asset diversification than buying a single property. The costs might be higher but risk will be reduced and it will be possible to sell a part of your holding if you need cash – an option not available if you own a single house, other than through borrowing. These funds may even be eligible for pension investment.

Last week saw me talking Sipps (again) in Bristol and moderating between three heavyweight fund groups – Artemis, Threadneedle and Fidelity. I am not sure what a moderator has to do. I suppose if I had been called “chairman” I would have been expected to direct the events more. However, with three opinionated individuals – two equity, one bonds – little was needed in the way of direction.

There were disagreements as well as common areas. The shrinking equity supply was a point made by two of the fund managers.This was generally accepted as bullish for shares but it was also acknowledged that the pendulum was still swinging towards bonds as pension fund managers continued to rebalance their portfolios. When I can decipher my notes, I will share more of their wisdom with you.


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