Buy-to-let tax relief could cost treasury more than all this year's anti-avoidance - Huhne

9.15.00am BST (GMT +0100) Tue 28th Jun 2005

The Liberal Democrats today said that the Treasury could lose half of all the tax revenue from closing tax loopholes thanks to new rules that allow high earners' to invest in buy-to-let property, foreign holiday homes, paintings, wine and vintage cars through their personal pension plans.

Chris Huhne, Shadow chief secretary to the Treasury, said that market research for City firms had suggested that the new pension rules would attract at least £1.3 billion of tax relief for investments in residential property, involving a loss of tax revenue of as much as £520 million.

"The best City estimate - from specialists who research the financial services market - is now that the Treasury will lose more than half of all the £1025 million that it pencilled into the budget as savings from closing down tax avoidance schemes" said Mr Huhne. "This is an extraordinary case of the Treasury being unable to see the wood from the trees."

Mr Huhne, who was speaking in the standing committee considering the finance bill, said afterwards that he hoped that the trade union leaders who had spoken out against the new relief - including Tony Woodley, general secretary of the Transport and General and Derek Simpson, general secretary of Amicus - would write to the Chancellor to press the Government to adopt the Liberal Democrat clause blocking the move.

Chris Huhne said that the pension rules that will take effect on 6 April 2006 allow people to get maximum tax relief at their top rate of tax on any assets held in a self-investment personal pension (SIPP) including overseas holiday homes, country homes that are let out, paintings and sculpture and personal collections of valuables.

The new provisions replace a controlled list of approved assets such as shares and bonds.

"The Treasury has completely underestimated the potential revenue losses from this change in the rules on assets. Many City advisers are now telling their clients that the new rules on SIPP are a fantastic way of buying assets with full up-front tax relief as you can invest up to 100 per cent of income with a limit of £215,000 a year" said Mr Huhne. "Any increase in value of assets within the pension plan, plus any income from those assets, is entirely protected from the taxman".

Mr Huhne said that the provisions were also wide open to abuse. "In theory, if you use the asset yourself, you are liable to a tax on benefits in kind. But this provision is wide open to abuse, as it is hard to imagine officials from Her Majesty's Revenue and Customs visiting, say, Croatia to check on whether a holiday home is genuinely empty and unlet at a particular time of year, or is being used by the owners".

The clause that the Lib Dems have tabled to the new finance bill would effectively limit the potential tax relief by restricting the ability of SIPPS to invest in directly-owned residential property and in assets such as wine or gold bullion that are not capable of producing an income return to the fund.