UK chancellor Gordon Brown surprised the financial advice and pension community in his pre-Budget report by closing a loophole that allows property to be placed tax free into the new SIPP pension product.

The government announced as much as two years ago that, under pension reforms to be implemented in April 2006, the new self-invested personal pension – or SIPP – could be used to buy residential property and other material assets at a substantially reduced tax rate.

The forthcoming implementation of the reforms has sparked a frenzy of predictions that SIPPs would provide a ‘pensions property bonanza’ as savers flocked to take advantage of the tax incentive to buy homes to let at discounts of up to 40%.

Despite repeated warnings from SIPP providers themselves – including major UK financial services players such as Standard Life and Abbey – the government has, until now, rejected calls for the tax relief loophole on SIPPs to be modified or scrapped altogether. Yet Mr Brown, it seems, has now woken up to the potential misuse of the loophole, and abruptly announced that the upfront tax relief element would be scrapped.

Savings providers are up in arms at the timing of the move however, claiming that an entire subsector of the pensions industry has been created to cater for the demand for property investment in SIPPs. Many of the policies offered to customers may now need to be amended.

Under the new terms of the ‘A Day’ pensions simplification outlined in the chancellor’s statement on December 5, residential property placed into a SIPP will still be immune from capital gains tax and there would be no income tax to pay on rent gained from tenants. But property bought with cash to be placed into a SIPP would now attract the top 40% tax rate at the point of purchase.

This amendment is designed to ensure that property investments are genuinely used to boost pension provision, according to the Treasury.