LAWYERS for some of Britain's wealthiest residents have uncovered a loophole in the pension rules that allows people to buy holiday properties with their retirement funds. Scores of investors, including senior directors at some of the City's top firms, have been quietly taking advantage of the perk to purchase holiday apartments in French ski resorts, coastal towns and even Paris with their self-invested personal pensions (Sipps). It had been thought Gordon Brown had stamped out the practice in December when he reneged on an earlier promise to allow Sipps to invest in residential property from April 6, including buy-to-let flats and overseas holiday homes.

However, lawyers have found a way to circumvent the rules by purchasing tourist apartments under the French ?leaseback? scheme. They are normally classed as commercial properties and hence qualify for SIPPS. Sykes Anderson, a firm of solicitors, has purchased scores of French leaseback properties for its well-heeled clients in the past few weeks, and hopes to branch into Spain, and possibly other European countries that also offer leaseback. Another firm is touting property in Cyprus for your Sipp. However, Sykes Anderson has asked all professionals involved in its scheme to sign confidentiality agreements to prevent precise details leaking out to the wider market. There are fears the chancellor could clamp down on the practice if ordinary investors start to pile into the plans, as he did with residential property.

It emerged last year that investors were preparing to stockpile up to ?10 billion in their Sipps to purchase buy-to-lets and holiday homes from April 6, which would have cost the government ?4 billion in tax relief on the contributions. When the scale of interest became clear it was forced to backtrack on the rules. David Anderson, chairman of Sykes Anderson, said: ?Brown's u-turn may appear to have ruled out using a pension to buy French property, but it is still possible. We do not see this as a product for the masses however and for most people the costs involved in setting up a SIPP purchase outweigh the benefits. With a pension of less than ?300,000 to ?400,000, fees will take a big portion of your fund.?

Mark Nathan, 48, works for a well-known IT firm, and is one of the investors who has used Sykes Anderson to buy a leaseback property with his Sipp. He recently completed the purchase of a self-contained apartment within a chalet in Les Gets, a French ski resort. Nathan said: ?One of the main attractions is that I have control over my pension and the underlying asset. I also think there is potential for good capital growth ? demand for apartments in the Alps is strong and it is difficult to get permission for new builds.? However, he said prospective investors should not be under any illusions. ?I have to point out that the process was complex, expensive in terms of the fees and very hard work,? he said. ?However, I am confident that the investment will provide a far higher pension income that I would obtain by investing the funds in the usual way.? Under the French ?leaseback? scheme, you buy a self-contained tourist apartment in a development and lease it back to a management company, which then lets it to holidaymakers on your behalf.

The developments are particularly common in French ski resorts, where firms such as Pierre & Vacances manage the properties on behalf of their owners, and are also typically found in Paris and coastal towns such as Nice and Cannes.

They are classed as hotels, which are still eligible for Sipps ? as long as you do not have any accommodation rights over the property. Most standard French leaseback schemes allow owners to stay in the property free for two to four weeks a year, so you would have to revoke this right before buying the flat with your Sipp. You would be able to stay if you paid an open market rent, but Sipp providers discourage it. Last week Revenue & Customs confirmed that leasenback properties qualify for SIPPS. ?Provided it is classed as a hotel and there are no rights to accommodation, it is not taxable and can be held in a Sipp,? a spokesman said.

You do not have to invest through the leaseback scheme: you could always source a hotel or tourist apartment yourself and hire a management firm. But the leaseback scheme cuts out the hassle of finding a property and attracts generous tax breaks in France. Leaseback properties are exempt from French Vat of 19.6% inside or outside a Sipp ? as long as you own them for at least 20 years. If you sell before then, you will have to pay back the Vat. Leaseback Sipps also attract generous tax breaks in Britain. When you contribute to a UK pension, the government offers tax relief of 22p for every 78p invested. A higher-rate taxpayer can claim a further 18p through their tax return. So it would cost just ?60,000 to get a fund of ?100,000.

Your Sipp can also borrow 50% of the value of its assets to buy property, so you could buy a leaseback apartment worth ?150,000 with a fund of ?100,000 and an outlay of only ?60,000. French leasebacks generally guarantee a rental income of 4% or 5% after expenses for a fixed term, usually rolling periods of nine years. This would be paid directly to your SIPP which would in turn pay off any mortgage repayments. Anderson admits a rental income of 4% or 5% is little better than the return on a deposit account. The real reason why investors are buying leasebacks, he said, is for capital growth.

However, other professionals question the growth potential of leasebacks, which have to be new or totally rebuilt properties. Peter Esders of John Howell & Co, a firm of international solicitors, said: ?As with any new-build development, there could be a glut of supply if a lot of people decide to sell up at the same time.? Anderson recommends that you buy only in the most desirable parts of France to maximise your returns. ?Don't think about Normandy, Brittany and Languedoc because you are just not going to get the returns.?