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Last Updated: Monday, 5 December 2005, 19:16 GMT
Treasury U-turn on new pensions
Country cottage
Not such a good investment now?
A pensions tax break which was due to be introduced in April will now not go ahead, the government has said.

The chancellor has decided that Self Invested Personal Pensions (Sipp) will not be given immediate tax relief for investments in residential property.

The proposal had been widely described as a tax break for the rich, who could use a Sipp to buy a second home or items such as fine wine.

The plan was first announced in last year's Budget.

It would have been introduced next April as part of a radical overhaul of all tax rules surrounding pension funds, known as A-day.

A Treasury spokeswoman described the new policy as "a proportionate response to an unintended consequence of simplification."

New tax arrangements

The original rules would have meant that high earners - who are subject to the top rate of tax at 40% - could have expected to be given a 40% rebate on the value of property (up to a maximum of 215,000) bought with their own cash using a Sipp.

The new tax rules for residential property bought through a Sipp will be rather different, although not totally prohibitive of using the pension to buy residential property.

A Treasury spokesman explained that money put into a Sipp would still attract tax relief.

But if the cash was used to buy a house or flat then a 40% tax bill would be slapped on it.

In additon, once in the Sipp the 'prohibited asset' could be in line for further tax penalties eqivalent to 30% of its value.

The Treasury said the aim of the new policy was to ensure that tax reliefs would only given to people genuinely using the Sipp to provide themselves with a pension.

The new policy will also apply to investments that are deemed to be "tangible moveable property" such as classic cars, fine wines, or works of art.

Tax drain

Last June, the Liberal Democrats claimed the proposed tax break would drain the Treasury of 2bn a year.

On Monday, the Liberal Democrat Work and Pensions Spokesman, Danny Alexander MP, said: "The chancellor has left it to the last minute, but at last he has seen sense by preventing second homes being purchased with Self-Invested Personal Pensions.

"The idea that the government should give tax breaks for second home ownership always was absurd."

The market research firm Datamonitor had gone further and estimated that the cost in tax relief handed out would rise to 4.6 bn a year by 2009.

Indirect investment in residential property will still gain tax relief.

The government made it clear that it will encourage and allow investment in a new type of investment vehicle, called a Real Estate Investment Trust or Reit.

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