The government’s decision to increase pensions tax for higher earners will kill off demand for commercial property investments in Sipps, pensions experts have warned.

In the Budget in April, the government said that it would taper off higher rate tax relief for those earning more than £150,000 from 40% to 20% for those earning more than £180,000 from 2011.

It also added a clause to prevent people maximising their contributions before 2011, saying that those paying more than £20,000 into their pension in a year would see their HRT allowance tapered early if these payments are higher than a person’s normal contributions.

But Nathan Bridgeman, director of Nottingham-based TM Sipp Services, said that as an unintended consequence of the new rules, people wanting to invest in commercial property within their Sipp will be discouraged from doing so by the higher tax liabilities unless they already have substantial amounts of cash holdings in the pension.

This is because the commercial property purchase counts as a pension investment under the new limits, he said.

‘You’ve got a situation where people can’t pay significant contributions into a pension scheme as a one-off payment to fund a property purchase,’ he said. ‘It’s the high-net-worth market that has this appetite for buying commercial property.’

Bridgeman said that the combination of low borrowing rates, high yields and low prices has sparked demand for commercial property purchases within Sipps, which will now be quashed by the tax changes at a time when the government desperately needs to kick-start the economy.

‘There has been a huge demand in using our Sipps for commercial property transactions over the past six months,’ he said. ‘That’s gathering pace; people are taking the view where the market’s bottomed out, it’s time to get in.’