SAVERS dreaming of a chalet in the Alps will not be able to rake in 40 per cent tax relief on the property price, after the Treasury made a dramatic last-minute U-turn on new pensions rules.

Two years after Gordon Brown announced the tax breaks and four months before they came into effect, he made an embarrassing climbdown yesterday, admitting that rules allowing investors to gain tax concessions by putting residential properties into self- invested personal pensions (Sipps) were open to “misuse”. He also revised his own rules for savers planning to use a Sipp to get tax breaks on exotic investments, such as wines, cars, art and antiques.

The about-turn came three months after the Treasury defended the rules, saying allegations that they could be used as a tax-avoidance measure were wrong. Pensions experts described the decision as incompetence. Ros Altmann, a pensions adviser to No 10, said: “This is making policy looking in the rear-view mirror.” Norwich Union, Britain’s biggest insurer, called the late change unhelpful, while Standard Life said that it was very disappointing. “This makes it very hard for pension providers to plan,” Iain Oliver, head of pensions at Norwich Union, said.

Lord Oakeshott of Seagrove Bay, one of the most vociferous campaigners on Sipps, welcomed the Chancellor’s climbdown. The Liberal Democrat spokesman on pensions in the House of Lords said: “Thank goodness the Treasury has finally responded to the campaign we’ve been running to highlight the expense to the public purse and the housing market posed by Sipps.”

The Treasury was responding belatedly to concerns that the rules would benefit only middle and high-income earners, who would use tax concessions to buy cheap second homes. Because of the tax advantages, investors would have been able to put as little as £120,000 towards a £200,000 house and have the Government pay the rest.

Opposition MPs had told the Chancellor that allowing savers to use Sipps to buy residential property would result in farmers being priced out of the countryside in the resulting holiday-home boom.

Meanwhile, insurers said that mis-selling would be rife as offshore property consultants marketed the relaxation of Sipps rules as a way of accessing a pension scheme before retirement. The Financial Services Authority is not due to begin regulating Sipps until April 2007.

Sipps allow people to take control of the investment of their pension savings. Before the new rules on Sipps were announced, only commercial property could be placed in Sipps, which were mainly used by partners in law and accountancy firms to invest in their own premises.

But in December 2003 the Chancellor said that he would relax the rules on Sipps by allowing savers to put residential properties, including buy-to-lets, holiday homes and even their own family home, into the tax-assisted wrappers. Exotic investments, such as vintage cars, could also be made under the new rules, he said.

Savers can put up to £215,000 a year into their Sipp and borrow up to half the value of the pension pot to fund further investments. Urged on by the buoyant housing market, savers embraced the idea and a study by Hargreaves Lansdown, the financial adviser, found that £8.5 billion would pour into Britain’s housing market from next April as investors took advantage. A further £1.5 billion would flow into overseas properties.

But Mr Oliver said that yesterday’s announcement meant that insurers would be reluctant to allow customers to put houses into their Sipps, after the Government threatened to deregister insurers that allowed people to misuse their Sipps. “When the Government starts using words like ‘prohibited investments’, people don’t like to go there.”

A Treasury spokesman said that it had clamped down on Sipps as part of its antiavoidance measures. “It was designed to encourage saving for a secure income in retirement but people were ready to abuse that,” he said.

Charles Suchett-Kaye, a partner at Reynolds Porter Chamberlain, the law firm, said that financial advisers could face legal action from investors. “There may be angry investors who became caught up in the Sipps hysteria and bought off-plan residential property. They will now find themselves with assets they would not have otherwise invested in or, without the tax breaks, that they’ ll find difficult to finance.”

Jerome Melcer, of BDO Stoy Hayward Investment Management, said: “Gordon Brown has made an enormous U-turn 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.”

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