Investors hit by the Government's U-turn on a pensions tax break could still profit from putting their money into commercial property, claims lawyer Nick Button, senior partner at Button & Co in Coventry.
He says people should look at alternatives following the Chancellor's decision on Self Invested Personal Pensions (SIPPs).
The Government decided that SIPPs would not give immediate tax relief for investments in residential property. It had originally proposed that from April 6 this year people would be able to buy personal property and put it into their pension schemes.
But now, although money put into a SIPP will still attract tax relief, if the cash was used to buy a second property it will be subject to a 40 per cent tax bill.
Once in the SIPP it could also be subject to more tax penalties. The new policy will also apply to other investments such as classic cars, fine wines, or works of art.
Mr Button said: "The original proposal would have enabled people to take money out of their SIPP to purchase buy-to-let properties which could be rented out to provide an income.
"What I think we could see now is people looking to alternatives such as buying commercial property for the same purpose which will be perfectly legal. Pension funds will still be able to borrow to help purchase properties although the maximum amount available to borrow will be 50 per cent of the gross value of the fund.
"Commercial property could be rented out to provide an income as would have been the case with private property but with commercial property, investors would still avoid the 40 per cent capital gains tax on any gain on the property."
Meanwhile, experts believe the new rules which allow investors to include commercial property funds in their tax-efficient savings schemes will provide funds with an estimated £8 billion boost this year. The rule change allows property funds to be included in Individual Savings Accounts (ISAs), Personal Equity Plans (PEPs) and Child Trust Funds (CTFs) for the first time.
"It rebalances an obvious inequality - that investors could enjoy favourable tax treatment in cash, equities and bonds, but not property," said Phil Wagstaff, managing director of UK retail sales and marketing for New Star fund manager.
New Star spokesman Ben Robinson said his company was expecting a significant increase in funds under management as financial advisers recommend clients rebalance their ISA portfolios to take account of this new asset class.
He said £82 billion was currently invested in ISAs and PEPs. Independent financial advisers (IFAs) were recommending that between five and 15 per cent of typical investors' total holdings, excluding their own property, should be in property.
Even taking a mid-range figure of ten per cent would give the sector an £8 billion boost, he said.
"The potential market is between £4 billion and £12 billion," Mr Robinson said.
"Up to now, equity income has been the top recommended sector but property has been increasing in popularity until it's almost neck and neck. We expect it to pass equity income this year."
Simon Wombwell, head of UK distribution at Scottish Widows Investment Partnership, said he expected the SWIP Property Trust to attract between £150 million and £200 million of new funds in 2006, double the figure seen last year as people start to diversify their portfolios.
He said such an influx of new funds was likely to continue for a few years until people had finished rebalancing their existing holdings.
Thereafter, he expected new business to fall away slightly, but still be higher than levels seen in 2005.