A summary of some of the key measures announced in the Chancellor's Pre-Budget Report on 9 October 2007 is set out below.

Capital Gains Tax (CGT)

The headline news from the Pre-Budget Report is the fundamental change to CGT. There will be a flat rate of 18% and taper relief/indexation will be abolished. The changes come into effect on 06 April 2008.

This is a blow for entrepreneurs who have built up businesses over many years and a massive tax cut for property owners. Hardly what you would expect from a Labour government.

One likely result will be a flurry of private companies being sold between now and April to avoid paying tax at 18% rather than the current 10%. Shareholders in AIM listed companies may also want to consider ways in which to crystallise any gains before April.

The 18% rate is clearly intended to respond to public criticism of the taxation of the carried interest of private equity funds. Carried interest is the way in which the management share in the profits of the fund. Some property funds also have carried interest arrangements similar to private equity funds and are equally affected by the changes. Despite the headlines "loopholes for private equity bosses closed" the changes are not as dramatic as has been made out. Significantly, carried interest will still be taxed as capital not income and the effective rate will be lower than 18% because of the "base cost shift" which attributes to the management part of the cost of investment originally incurred by the (typically exempt) investors. In any event, the 10% rate did not always apply because of issues as to when the "taper relief clock" started to run: often this was not until the hurdle rate of return for investors had been achieved. So, is this an apparent climb-down to quell the furore without actually making changes significant enough to drive the industry offshore?

The changes affect only individuals and trustees and do not affect the corporate or institutional sectors, which are the main property investors. Nevertheless, for individual investors (and funds targeted at individual investors) we can expect to see most property sales deferred until the 18% rate comes in. The exception will be property which is let to unquoted trading companies which currently qualifies for business asset taper relief where the pressure will be to realise gains while the 10% relief is still available.

Stamp Duty LandTax (SDLT)

An anti-avoidance provision introduced in the Finance Act 2007 had an unintended effect on property funds structured as partnerships in that it led to an SDLT charge on changes in profit-sharing ratios even when there was no consideration and no connection between the investors. This provision will be removed with retrospective effect to the date it first came into effect, 19 July 2007.

Consultation is to take place on extending the anti-avoidance disclosure regime to high value residential properties and "addressing the use" of Special Purpose Vehicles (SPVs) for high value residential property. There is no mention of the use of SPVs to hold commercial property.

VAT

Renovations and alterations to residential properties that have been empty for at least two years will be eligible for the 5% VAT rate. Currently such properties need to have been empty for three years.

Planning Gain Supplement

The Planning Gain Supplement, which was to be a new levy on development to raise funds for infrastructure, will not now be introduced. Instead, a planning charge or "tariff" will be introduced into the Planning Reform Bill. This will be similar to a "roof tax" already operated by a number of local authorities. It is expected to be a set amount per dwelling or per square metre, and will apply to all developments. This is the solution which was lobbied for by key players in the property industry. Local authorities will be given the power to levy the charges alongside negotiation of other elements in Section 106 Agreements as with current practice. The Government will consult on tax before its inclusion in the Planning Reform Bill which is expected in November.

REITS

The Government have reviewed the viability of residential Real Estate Investment Trusts (REITS) and the listing requirements for REITS but have decided not to make any changes to the REITS regime at present.

Non-Domiciliaries and Residence

The Government has announced that from 6 April 2008 non-domiciliaries will have to pay an annual charge of £30,000 if they want to continue to benefit from UK tax exemption for their foreign income and gains. This looks like a blatant rip-off of last week's proposals by the Tories. The charge will apply only if the non-domiciliary has been resident in the United Kingdom for seven years or more. The Government has also said it will be consulting on whether non-domiciliaries who have resided here for more than ten years should have to pay more than £30,000.

Non-domiciliaries will also be denied personal allowances. A further package of measures are aimed at stopping arrangements to enable non- domiciliaries to bring income and gains into the United Kingdom without incurring a tax charge. These arrangements include the use of offshore trusts and companies to convert taxable income and gains into non-taxable payments. Another technique that has been used has been to remove the source of the income, e.g. by closing a bank account, and relying on the doctrine that no tax can arise if the source for the income exists no longer exists when the income is brought back into the United Kingdom in the following year.

The tests determining residence by reference to the number of days spent in the UK will be changed so that travelling days will now be regarded as days spent in the UK.

It is generally looking bad for non-domiciliaries.

Inheritance Tax

Headlines such as "IHT allowance doubled" are wrong. All that will happen is that the nil-rate band will become transferable between spouses. The double use of the nil-rate band was already available to any well advised couple. The measures do not help unmarried couples, siblings etc. This measure cannot be compared with the Tories’ proposals to raise the nil-rate band to £1 million per person.

Settlement Code and Arctic

Small businesses often operate though a company owned equally by the husband and wife. This enables them to take advantage of both of their personal reliefs and lower rate tax bands. In the "Arctic Systems" case, HMRC attempted to apply the existing settlement code to this common arrangement but were defeated before the House of Lords. As announced at the time, HMRC will be amending the settlement code so that it does now apply to these types of arrangements.

Stamp Duty

Certain transfers of shares and securities for no consideration attract a fixed stamp duty charge of £5. These will now be exempted, as will transfers of shares and securities where the consideration is less than £1,000.

Anti-Avoidance

A number of anti-avoidance measures have been introduced.

Tax relief is available for interest on loans to invest in partnerships or certain small companies. A scheme to accelerate the benefit of this tax relief has now been stopped.

Sale and leasebacks have been used to transfer the benefit of capital allowances from taxpayers unable to make use of them to taxpayers that could use them. These transactions will now be taxed as loans to prevent the transfer of the capital allowances.

Schemes which enabled taxpayers to claim a tax deduction for the cost of assets bought and then leased out while not paying full tax on the rental income have been attacked.

A company is exempt from tax on dividends and other returns generated by shares. But a company is taxable on interest from loans. HMRC have seen schemes using loans disguised as shares which generate a dividend-type return. Up to now these returns have not been taxable. Now, they will be.

Companies are eligible for tax relief on contributions paid to registered pensions schemes for the benefit of their employees. However, the tax relief for some large contributions is spread over four years. HMRC have seen schemes designed to circumvent the requirement to spread the tax relief by routing the contributions through a different company. This will be stopped.

This article is only intended as a general statement and no action should be taken in reliance on it without specific legal advice.