HUNDREDS of thousands of people in ailing property funds could receive a welcome boost under new rules that will scrap an onerous tax on investments.

The move will benefit those who hold property funds through Isas, pensions and child trusts funds.

Although these schemes are supposed to be tax free, investors are currently hit by a 20% charge on the rental income the property fund receives, acting as a drag on returns.

From April, the funds, which include some of the biggest investment schemes – the £2.6 billion Norwich Property Trust and the £1.5 billion New Star UK Property unit trust – will be granted the means to allow investors to claim this money back.

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Rental income makes up a large proportion of the returns, and has become even more important as the commercial property market has slowed.

Advisers say that investors through Isas, child trust funds and pensions could be nearly 20% better off where most of the overall returns are derived from rent. It could, for example, mean an extra £70 a year to an investor with a £7,000 Isa invested in one of these funds, given a 5% rental yield.

Advisers hope this will give a fillip to property funds, which invest in shops, offices and industrial premises. The Investment Property Databank said total returns are down 12% over the past six months.

The crisis has prompted some of the UK’s biggest property funds to tell investors they will have to wait up to a year to get their money after several shut the door on immediate withdrawals.

To qualify for the tax break, schemes will have to convert into “property authorised investment funds”. Payments will still be subject to 20% tax but nontaxpayers such as Isa investors can reclaim it.

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