Of all the new investment opportunities available for those saving for their retirement from next year, residential property is generating the most excitement.

From April 6, Sipps rules will change to allow residential property, including homes bought in the UK and overseas, to be included in the pension wrapper, alongside commercial property.

This will mean that, for the first time, investors will be able to claim income tax relief of between 22 per cent and 40 per cent, depending on their tax rate, to put a holiday house, or even the family home, into a pension. Other tax breaks from April 6 mean residential property will also be sheltered from capital gains tax if it grows in value while held in the Sipp. Rental income is also immune from tax while inside the wrapper.

With these generous incentives, it is no surprise that there has been a flood of interest, particularly from those who see a Sipp as a discounted ticket to property riches.

But while the tax breaks appear seductive, there are many reasons why investors should look before they leap, not least that it could be a costly, complicated and potentially risky way to save for retirement. One of the first reality checks for those hoping to shift an existing rental or second property into their Sipp, is the fact that this will not be without cost.

“Under the rules, properties placed in a Sipp will be owned by the fund, so charges such as stamp duty will apply, even in the case where the Sipp holder transfers his or her own property,” says the Royal Institute of Chartered Surveyors.

“Buy-to-let and second home investors looking to place existing investment properties into a Sipp will also have to pay tax on outstanding capital gains, as in the case of a conventional sale.”

Those hoping to finance their first step on to the property ladder through a Sipp face other hurdles in that they are likely to need more cash up front than they would to secure a loan outside the Sipp wrapper. This is because while the pension can take out a mortgage for a property, borrowing is restricted to just 50 per cent of the amount in the pension pot.

This means higher rate taxpayers will need to pay in a minimum of £60,000 to their Sipp to purchase a £150,000 property, which is the average median house price in Great Britain, assuming they claim the £40,000 tax relief and borrow 50 per cent, says Rics.

Another feature of Sipps is that the trustees will be responsible for managing the assets held in the fund and ensuring a good return on the investment. In practice, this will mean the individual has to surrender control over his or her retirement nest egg, as even doing DIY on the property, such as replacing a kitchen, is likely to need the approval of the trustees.

As owners of a buy-to-let, the trustees must also comply with strict health and safety rules relating to the condition of the property.

“The potential liabilities of a landlord in the context of a buy-to-let are actually quite frightening,” says David Baker director of James Hay, the UK’s largest Sipp provider. “For example you need to get a certificate that the furniture is flame-retardant. It’s massively more complicated than commercial property, which tends to be longer lease.”

Some Sipp providers will allow Sipp members to manage the property, particularly if they are experienced buy-to-letters, having made them legally responsible for meeting health and safety rules.

But most are likely to insist that the property is managed by a professional agency, meaning charges of 10 to 15 per cent will be shaved off your rental yield.

Another important consideration for those wanting to retain full use, or even partial use, of a property they put into a Sipp – a holiday home for example – is that you won’t be able to stay there for free. Under the rules, a member of the family must pay full market rent if they use the property or face paying a benefit-in-kind tax to the Revenue. For this reason, Standard Life, one of the UK’s largest Sipp providers, will not allow its Sipp holders to put the family home in its Sipp after April 6.

“Many people find that they don’t budget correctly for the rent and end up with a tax charge which could run into thousands of pounds,” says John Lawson, head of pensions policy with Standard Life. “The larger the property, the bigger an issue this could be because of the way the tax is calculated.”

Those considering putting an overseas property into their Sipp face an added layer of complication. The most pressing being that many European countries popular with British investors, such as Spain and France, do not recognise trusts, meaning the Sipp cannot own property. There are ways around this. You could set up a company in which the Sipp would hold shares to buy the property. But, even with the protection of a Sipp wrapper, a UK tax resident can still face a minefield of local income, wealth and inheritance taxes.

“Overseas taxes can normally be offset against UK tax due, under the prevailing double taxation treaty but clearly if there is no UK taxation due, then there is no credit to be obtained from such a treaty,” says Andy Bell, managing director of AJ Bell, a Sipp administrator.

There are other reasons to take a sanity check too, a big one being whether it is sensible to be overweight in any asset class, particularly property.

“People must not be seduced into buying property, even though house prices have rocketed and stock markets have slumped in the recent past,” says Alan Goodman, chairman of the financial consumer support committee of the Actuarial Profession, the industry body.

“The value of houses, too, may fall as well as rise and the lack of liquidity that could arise from being a forced seller in a falling market could have very serious implications on an individual’s ultimate income in retirement.”

Reasons to be cautious P10

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