Best to wait and see before passing judgment; Property briefing.

Byline: Richard Freeman-Wallace

THE recent pre-budget report from Alistair Darling included positive news for the property industry, with plans for a controversial planning gain supplement scrapped.

The proposed supplement - a tax on the increase in land value following a planning consent - has been unpopular with developers since first mooted two years ago.

The Chancellor said that he is now considering proposals for new legislation put forward by developers and homebuilders as an alternative to the planning gain supplement.

The British Property Federation, Home Builders Federation, Major Developers Association and London First suggested an alternative 'planning charge' which looks at a system of standard planning charges or tariffs set locally to reflect regional needs.

The planning charge would be proportionate to the size and scale of a development. The charge would cover commercial and residential property and would have a set rate for a building or per square metre of space. The developer would pay the planning charge to the local authority.

The charge would include contributions towards regional infrastructure delivery, such as for housing, where it could be in the form of a roof tax on new development.

It will not, however, replace negotiated agreements through Section 106. These will still be necessary to secure affordable housing and specific costs related to some development sites.

The charge will have to be equitable for all developers, and supplement section 106 agreements that ensure funding is committed to local projects around development schemes.

We have to wait to see details of the new tax and the guidelines of the Planning Reform Bill before making judgment.

Developers will no doubt be interested to find out how they are expected to raise the money to pay the tax before development begins and profits are realised from the property.

The Planning Reform Bill is unlikely to pass through Parliament until mid-2008, therefore a new planning charge is unlikely to come into force until late 2008 or early 2009.

Alistair Darling also announced that all taxes on capital gains will be reduced to a flat 18% rate from April 2008, and that the complex taper relief will be scrapped.

If you sell property after April 6 next year, you will not get taper relief or indexation allowance.

The calculation of the amount of the gain will be simpler, and it will be the same, however long you have owned the asset.

Taper relief was first introduced in 1998 to encourage entrepreneurs to focus on the long-term. Hence relief is highest for those who hold assets for more than 10 years.

Currently, commercial property investors who use their property to carry out their business or lease it to an unlisted trading company can reduce their gain by taper relief - 50% after 12 months ownership and 75% after two years, hence a 10% effective tax rate.

Investors considering a sale will need to review whether their taper relief entitlement would result in a 10% CGT charge if they sell before the April 6 cut off date. Anyone thinking about such a move should first take advice.

A rush to sell buy-to-let properties next year has been forecast. Sellers from April 6 onwards will pay an 18% CGT rate - against up to 40% of sale profits under the present taper system, where the lowest rate of tax for an asset held for at least 10 years is currently 24%.

Richard Freeman-Wallace is head of property at Watson Burton LLP.