Landlords fear rent squeeze from new kids on the block

Landlords may lose out as a result of some of the proposals in last week's Budget, particularly those relating to property investment funds and self-invested personal pensions.

Landlords may lose out as a result of some of the proposals in last week's Budget, particularly those relating to property investment funds and self-invested personal pensions.

The fear is that Pifs and Sipps will significantly increase the number of people investing in property - to the disadvantage of existing landlords, who could see a fall in the value of their portfolios.

"It is likely that the new property investment funds [Pifs] will favour large companies, possibly at the expense to the letting market of the hands-on landlord with a small port- folio," warns Adrian Turner of the Association of Residential Letting Agents (Arla). "It is this new breed of buy-to-let investor who has done so much to revitalise the lettings market and to make renting socially acceptable once again."

However, Helen Demuth, a tax expert at Smith & William- son, the independent professional and financial services firm, does not foresee a problem. She argues that Pifs are likely to invest in different types of property than those bought by the tyical buy-to-let landlord, so shouldn't have a direct impact.

"A lot of buy-to-let properties are fairly cheap, whereas Pifs will probably be quoted and therefore won't be interested in the back-street properties," she says. "Pifs are more likely to invest in higher-quality residential and commercial properties and blocks of flats, rather than small houses, partly because they are much easier to manage."

The decision to include residential property in Sipps might not always be a good idea either, particularly under current rules. "The problem with property is that it is an illiquid asset, and if it is in your pension fund when it comes to buying an annuity, you will have to sell it to do so," warns Ms Demuth. "That may be really inconvenient timing."

But John Heron, the managing director of Paragon Mortgages, reckons that this problem will put pressure on the Government to change the rules on compulsory purchase of an annuity. Under existing legislation, you must buy an annuity - a guaranteed income for life - with at least three-quarters of your pension pot by the age of 75. The remainder can be taken as a tax-free lump sum.

"Including residential property in a Sipp is an entirely sensible change," he says. "This will provide an income stream [from the rent] until the age of 75. But there are also proposals to remove the need to purchase an annuity, which would produce a continued income stream - a very good idea."

Investors should also remember that property held in a Sipp won't be entirely tax free. "At face value, the opportunity to invest £200,000 in residential property and receive tax relief of £80,000 is immediately appealing to those saving into a Sipp," says Jerome Melcer at accountants BDO Stoy Hayward. "But apart from the tax-free lump sum of 25 per cent, the income received from the pension in retirement is taxed on the way out."

The Budget did contain some good news for "green landlords" who make their rental property more energy efficient, with the introduction of an Energy Saving Allowance. From 6 April, landlords who pay income tax will be able to claim an immediate tax deduction of up to £1,500 on the costs of installing loft or cavity wall insulation.