In Budget 2013, Chancellor George Osborne indicated he would allow pension relief on homes converted from unused commercial buildings.
However, HM Revenue and Customs has now contacted pension firms confirming the idea has been scrapped.
But although the scheme has been shelved, the principle of placing residential property in pensions remains under review.
In the Budget, Osborne said: “We want to look at whether converting unused commercial properties in high streets into homes could win support by changing pension schemes rules that currently exclude residential property as pension fund assets.
“Any change would have to match government pension strategies and public finance constraints.”
The letter from HMRC to the Association of Member-directed Pension Schemes (AMPS) explains that a cost-benefits analysis of the proposal shows that letting pension investors include residential property in their pensions would not be worthwhile.
“The findings of the analysis showed that any benefit would be marginal at best when looking at the cost of converting commercial property to residential standards.
“The result is the government considers that the benefit of introducing the scheme would be expensive and complicate the tax code even more in relations to pensions. The other is the government cannot risk losing tax when the Treasury is working hard to reduce the deficit.
“Although the government has decided not to make any changes to pension rules at this time, the door is not closed on the possibility and the policy remains under review.”
Pension rules drawn up by the Labour government for A Day – April 6, 2006 – included residential property as a pension asset in the draft legislation.
However, the option was removed before the policy was published as a bill, as Labour considered the move favoured wealthier property investors and would provoke a backlash from voters.
AMPS chairman Andrew Roberts explained the idea was to allow residential property converted from commercial buildings to be held in self-invested pension plans (SiPPs).
“Unfortunately they believe the scheme would not provide enough extra homes to merit the costs and work involved in drafting more complex pension rules on top of those we already have.
“We do feel that the chance to clarify the definition of residential property has been missed.
“We do hope they look at business rates on empty properties and how these can impact pension funds. Paying rates on empty property can be a strain if the pension is not receiving ongoing contributions and as the life time and annual allowances decrease, this is a real problem.”