INVESTORS who rushed to buy new-build houses with their retirement kitty could face a tax bill of more than 100 per cent of the property value after the Chancellor’s U-turn on holding homes in pensions.

Anyone who thought they had bought an off-plan property worth £100,000 for just £78,000 through their pension scheme could end up paying £210,000 under a bizarre loophole created by Gordon Brown’s surprise decision.

Since December 2003, the Government has been telling investors they will be able to hold residential properties in self-invested personal pensions (Sipps) from April 6, 2006. But this week Gordon Brown changed his mind and residential property will no longer be a viable pension investment.

Experts believe that thousands of savers have already committed cash to property developments. Developers in the UK and Europe have been using the proposed changes to the Sipp rules to attract would-be property investors.

Iain Oliver, head of pensions at Norwich Union, the insurer, says: “A lot of people have bought properties ahead of the rule changes. The Sipp market is hard to size anyway, but it’s virtually impossible to work out how many people have been hurt by this.”

A property is considered to be residential only if it is habitable. While a house is still being built it can be bought through a pension with full tax relief. But Gordon Brown’s U-turn means that the tranche of investors caught by this loophole will have to sell the property before it becomes habitable otherwise they will face punitive tax charges.

Investors holding an unauthorised residential property face a personal income tax charge of 40 per cent on the value of the house, as well as a further punitive 15 per cent charge. The pension scheme itself will incur separate tax charges of up to 55 per cent.

Tom McPhail, head of pensions research at Hargreaves Lansdown, the independent financial adviser, says: “A lot of investors will be very unhappy. The manner in which the Treasury made this decision is particularly disappointing.”

Simon Tyler, of Chase De Vere Mortgage Management, the broker, says: “We have many clients who have bought properties with the intention of placing them into Sipps next year. They had no intention of ‘abusing’ any system, but merely wanted to plan for a comfortable retirement. If the Government was seriously considering scrapping the idea it should have at least hinted as much at some time in the past few months.”

There is no means of gaining compensation from either the Government or any of the developers who were promoting property on the back of the proposed new Sipp rules.

The only chance of redress is for investors who were told by a financial adviser that they should move their pension pot from a regulated product such as a unit trust to a Sipp, without being warned that the new rules might not happen. The Financial Services Authority says that in this case you should pursue the claim with the firm and then through the Financial Ombudsman Service.

Investors who were persuaded to move cash from a company pension scheme into a Sipp could also pursue their adviser for redress. However, some may still wish to keep the property. Mark Harris, managing director of Savills Private Finance, another mortgage broker, says: “The Government’s U-turn does not change the fact that buying an off-plan property for the purposes of buy-to-let can still be a good long-term investment.”

Mr Oliver said that research by Norwich Union suggested that amateur buy-to-let investors were more likely to have been drawn to the idea of purchasing a property through a Sipp.

He says: “A lot of experienced property developers backed away from the idea as soon as they realised how much control over the property they would have to give up. The ordinary consumer was getting drawn in because of the appetite for residential property.”

George Georgiou, an experienced property investor, was wary of putting residential property into a Sipp from the start. The 28-year-old, who has a portfolio of 40 buy-to-let investments, mostly in London, says: “I looked into it when the Government first announced the measures, but it looked too confusing and only seemed to benefit those who already had a large pension fund. Many have now suffered as a result of the U-turn, I am pleased that I did not get involved.”

Mr Georgiou has escaped the dilemmas now faced by thousands of investors who have already signed a contract to buy property with the intention of investing it in a Sipp.

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