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Property investors still able to benefit from Sipps

6th December 2005 | back to article listings BACK    print this article PRINT

The chancellor Gordon Brown has surprised many in the property market by announcing that residential property invested in a Sipp will not attract the tax advantages that had been widely anticipated, unless the investor invests via specialist property funds such as those launched by Assetz last week.

Originally proposed in last year's Budget, the policy had led many to invest in buy-to-let property and second-homes, but yesterday's announcement has caused widespread disappointment. Closer inspection of the pre-Budget speech, however, reveals that Sipps still provide an attractive option for property investors if they invest in residential property using a fund.

The government blamed the u-turn on the exploitation of Sipps by the tax-avoidance industry and as such, genuine property investors may not be particularly affected by the changes in policy.

The new proposals indicate that money invested in a Sipp will still attract tax relief. The difference after yesterday's speech is that the money will now be subject to a 40 per cent tax bill when it is used to buy a property.

Significantly, however, when the property is inside the Sipp, it will be exempt from capital gains tax and the owner will not be required to pay income tax on rent from tenants. The BBC has observed that theoretically, this provides an attractive option for property investors who are willing to leave property in a Sipp for a long period of time.

Stuart Law, managing director of property investment specialist Assetz, has also drawn attention to the fact that the government has reasserted its commitment to residential property investments via funds.

Furthermore, Mr Law welcomed the proposed Real Estate Investment Trusts (REITs) pointing out that they hold the capacity to provide essential funding for housebuilders and specialist funds for prospective investors. Conversely, he warned that low borrowing levels will make REITs less desirable than they may otherwise have been.

"The borrowing limitations have been imposed for reasons including tax and risk reduction, to avoid situations where gearing is sued to manipulate returns and avoid tax by gearing up through non-UK sources," he said.

"But if they fail to allow the market to decide what borrowing levels should be, the government is adversely affecting the popularity of REITs amongst property investors whilst preventing only a low level of abuse," he added.

Gordon Brown stressed that there are a number of conditions that need to be established before a company qualifies to apply for a REIT. The policy is only available to property firms resident in the UK for tax purposes and it is also necessary to be registered on the stock market. Companies that do qualify for REITs will not be required to pay corporation tax but around 95 per cent of net profits will have to be distributed to investors.

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