Tax breaks on second homes could worsen rural housing shortage

Gordon Brown, the Chancellor, is under pressure to rethink his proposal to hand the better-off an effective 40 per cent discount on buying a home from next April by allowing them to include buy-to-let property in their pension pot for the first time.

There are fears that the self-invested personal pensions (Sipp) scheme could price local people in rural areas out of the housing market and drive prices up.

The issue is to be investigated by the Affordable Rural Housing Commission, set up by the Government to suggest ways of increasing the supply of homes in the countryside. Its chairman Elinor Goodman, the former political editor of Channel 4, said yesterday she was "concerned" that the tax breaks could worsen the problem of housing shortages in rural areas.

She told BBC Radio 4's Costing the Earth programme: "I think it is going to be some time to see whether that does have the impact which some are saying it will. But on the face of it, it does seem contrary to the idea of trying to keep prices down in the country."

Some financial advisers said that tens of thousands of people were likely to take advantage of the new scheme. It would help top-rate taxpayers, who enjoy 40 per cent tax relief on their pension contributions, more than those who pay the basic rate, who receive 22 per cent relief. So it could reduce the cost of a second home from £200,000 to £120,000 for the better-off, with the Government meeting 40 per cent of the cost.

With the cost of housing a huge issue in rural areas, some councillors are alarmed by the possible impact. Stan Collins, a Liberal Democrat councillor in South Lakeland, said the scheme was "completely insane". He added: "It will give a large subsidy to second-home owners. Gordon Brown is more keen on providing a tax shelter for the rich than helping people to get homes who need them."

A Treasury spokesman said: "Elinor Goodman's comments do not reflect government policy and Sipps are not an area that the independent Affordable Rural Housing Commission has investigated. The changes to Sipps are part of a wider pensions taxation simplification reform which, among other things, creates a single set of investment rules for all pension schemes benefiting all savers."

The Treasury insisted the rules would be unattractive to those wanting to use the scheme as a means of purchasing a second home or retirement property. Only 50 per cent of the net current value of the pension pot could be raised as a loan to fund the property purchase, making it a realistic proposition for only those with the largest pension pots. All rental income would be "locked away" in the pension fund, which could make the scheme unsuitable for many buy-to-let landlords needing income before retirement to fund mortgage payments.

Any property already owned placed into a pension fund would incur transaction costs such as stamp duty. Non-commercial use of the property - such as the owners living in the home themselves and not paying a commercial rent - would be regarded as a benefit in kind for tax purposes.