The government has provoked howls of outrage from the financial services industry after slamming the door in the face of investors hoping to shelter residential property in Sipp pension plans from next April.
In a huge U-turn the Treasury has apparently realised the potential huge loss to the Exchequer posed by the A-Day pension reforms. This year's Budget raised the prospect of residential property and alternative assets such as fine wine being eligible for Sipps (self-invested personal pensions). However, the government says it now wants to "tighten the rules" to prevent "potential abuse".
"All those people who thought they could transfer their residential property into their Sipps will have to think again," said Philip Wood, director of personal finance planning at PriceWaterhouseCoopers.
Brown referred in his speech to Parliament only to "the misuse of Sipps schemes to purchase second homes" in reference to the Treasury's latest brace of anti-tax avoidance measures.
However, the wider scope of the clampdown was revealed in a technical note from the Inland Revenue. Investment in residential property via a pension will only be allowed indirectly, for example by a fund. This fits in with the government's plans to introduce real estate investment trusts. By apparently making buy to let and holiday homes ineligible it could save the Exchequer up to 4 billion pounds in lost revenue.
Financial advisers were incensed by the sudden change of heart, although it is possible that there has been a mistake in drafting the technical note and that the Revenue really means to prohibit assets that are held for personal use.
Tom McPhail, head of pension research at Hargreaves Lansdown, said: "There are going to be a lot of disappointed investors out there today. From the industry's point of view it's deeply unfortunate that the government has done a complete volte face so late in the day. Gordon Brown was on the record a couple of years ago saying this wouldn't be a problem but clearly it now is. The lobby groups have clearly got to him."
Ben Gibbs, an independent financial planner with Re-Financial Planning, said the surprise U-turn would in particular upset those investors who had based their retirement plans around the expectation that residential property be included in Sipps from next April. This includes investors with large pension funds and high earners.
Gibbs said: "Some people have been setting up Sipps and moving all their money into them in anticipation of this. To get so close to A-Day and change the rules in shocking."
Stuart Law, managing director of property investment specialist Assetz, said: "The chancellor has performed a quite remarkable u-turn", stating that residential property in a Sipps will no longer attract tax advantages when the new pensions simplification changes come in next April.
He added: "The majority of enquiries we were receiving were related to holiday home purchases and whilst many of these had an element of investment about them, it was clear that the suitability of the properties as a pension asset to provide income in retirement was questionable."
Jerome Melcer, actuarial director BDO Stoy Hayward Investment Management, said: "Gordon Brown has made an enormous u-turn on Sipps that has wasted thousands of hours of professional time. An entire industry has been set up to deal with property-based Sipps and now it's all been canned."
Melcer condemned the inconvenience for investors. "Less than four months to A-Day, people have already taken action to change pension arrangements, including irrevocable decisions over pension transfers and large new contributions. These individuals will have incurred professional fees and other costs in pursuing a strategy that is no longer viable. Luckily there is protection for people who have already committed to buy residential property with their Sipp as their investment is protected but for anyone else trying to get involved there will now be swingeing tax penalties for doing so."
Sipp info from reuters