A controversial tax break, which would, from April next year, have allowed the well-off to put their properties into a Self-Invested Personal Pension (Sipp) effectively tax-free, was yesterday blown off the residential property map in a thinly disguised U-turn in Mr Brown’s pre-budget speech.

A brief mention of Sipps in the chancellor’s speech merely announced that action would be taken to prevent "misuse". Later, a more detailed note said: "Sipps will be prohibited from obtaining tax advantages when investing in residential property and certain other assets such as fine wines, from 6 April 2006."

The proposal to allow homes into Sipps, introduced in last year’s budget, had been widely described as a tax break for the rich, who could use a Sipp to buy a second home or items such as fine wine.

A new buy-to-let & Sipp industry, gearing up for a potential 50,000 properties, worth around £24bn, according to RICS estimates, is now stranded with nowhere to go, as are a number of people already committed to buying off-plan.

It is thought that the government will still allow residential property to be purchased though a Sipp, but that the tax advantages will be negated by a 40% tax bill slapped on it. From then on however, the property would escape capital gains tax and tax on rental income. This means there may still be a benefit for those genuinely interested in providing for a pension, by leaving the property there for a long time.

Real Estate Investment Trusts

People may still be able to invest in residential property in pension funds through Reits, which are likely to be introduced in 2006. Draft legislation for Reits will be included in the 2006 finance bill.

"To widen the number of investors in the residential and commercial property markets, we will this month publish legislation to set up in Britain Real Estate Investment Trusts that will increase the funding of new property developments," Mr Brown said in his pre-budget report.