Gordon Brown's most recent Budgets have spelled change for the property market. The mixed bag of measures they have introduced have affected the ways in which property transactions are structured, largely through a raft of tax changes.

The most recent Budget was no different. Although the Government did not increase the rate of stamp duty land tax (SDLT) above the existing 4% rate, and committed itself to looking at introducing real estate investment trusts (REITs) next year, this is tempered by the introduction of more red tape in the form of disclosure rules for SDLT, the withdrawal of SDLT relief for commercial property in disadvantaged areas and the closure of various tax loopholes which previously allowed taxpayers to reduce their liability when buying properties.

The possibility of a land development tax also still lurks in the shadows. This article outlines some of the key tax changes in recent years.

REITs

Although there was no reference to REITs in the Chancellor's Budget speech, on the day of the Budget the Treasury published a paper discussing this topic. In this paper, the Government confirmed its commitment in principle to introducing a UK REIT; this would probably take the form of a closed-ended company, incorporated under UK Companies Acts. The Govern-ment's commitment has been received very positively by the property investment community, but there is still a lot to be resolved.

The Treasury is engaging in further dialogue with industry representatives regarding how a UK REIT would be treated for tax purposes. If a workable solution is found – "incurring no overall cost to the Exchequer" – the Government aims to legislate for a UK REIT in the 2006 Finance Bill.

A key objective of the Treasury in the introduction of REITs is to align the taxation of direct property investment and indirect property investment more closely. The discussion paper notes that: "Many REIT jurisdictions operate by allowing the company to be tax-exempt. This means that rental income and capital gains derived from properties that fall within the allowable definition of the regime are exempt from tax at the company level (the REIT). Instead, the REIT distributes most of its income, after operating costs, to investors, who are then taxed on this investment income. The result is that investors face broadly the same tax treatment as they would have, had they owned a property directly."

The consultation process is well underway with various steering groups reporting to the Treasury on their findings. The tax treatment of the REIT system is proving to be a key issue. Whether there will be withholding tax on distributions to investors, tax charges within the REIT itself or indeed a 'conversion' charge for existing vehicles converting into a REIT is still to be resolved. The answer to these questions will go a long way to determining the attractiveness of REIT vehicles and whether they will be successful in stimulating property investment opportunities.

SDLT

There have been a number of changes in the SDLT area in recent years, including the charging of SDLT on property partnership interests, which has militated against using partnerships as vehicles for property investment. This change was deeply unpopular and brought about a large-scale migration of property holdings to offshore vehicles.

Some of the more recent changes are set out below: . Withdrawal of disadvantaged areas relief for non-residential property: In this year's Budget, disadvantaged areas relief has been withdrawn for non-residential property transactions, the effective date of which was on or after 17 March, 2005. Disadvantaged areas relief for residential property transactions remains unaffected. Many property investors were taken by surprise at the withdrawal of this relief, it having only been introduced in 2001 (for properties up to £150,000) and 2003 (for all commercial property in disadvantaged areas).

Arguably, the relief had been fairly unsuccessful in its policy objective, which was to encourage investment in commercial property in disadvantaged areas, and there is anecdotal evidence that the availability of the relief had simply allowed property companies to increase the price on the sale of buildings. For the property industry, the withdrawal of the relief is seen as a tax-raising measure, which is expected to raise £350m in return for little negative publicity.

. Group relief: The new Finance Bill contains provisions to change the SDLT group relief rules. The 2003 rules provided for a claw-back of SDLT group relief if the transferee company ceased to be a member of the transferor company's group within three years of the date of the transfer of the relevant property. The new rules will tighten up on schemes aimed at avoiding this claw back by the use of so-called 'bungee' schemes or 'sideways transfer' schemes, which are essentially devices for selling a property out of a group without an SDLT cost.

It is also expected that a general anti-avoidance rule will be introduced in relation to SDLT group relief. This will apply where a transaction is not effected for bona fide commercial reasons, or where a transaction forms part of arrangements of which the main purpose, or one of the main purposes, is the avoidance of liability to tax. There is little doubt that this measure will introduce greater uncertainty in the operation of the SDLT group relief rules, which are already subject to specific anti-avoidance measures.

. Acquisition relief: New provisions are also expected which will prevent acquisition relief applying

in circumstances where, for example, an investment property is sold for an issue of shares/assumption of debt. Acquisition relief generally applies where: the consideration for an acquisition of whole or part of the undertaking of the target company consists wholly or partly of an issue of non-redeemable shares in the acquiring company to the target, or to the target's shareholders; and the acquiring company is not associated with another company that is party to arrangements with the target relating to shares of the acquiring company issued in connection with the transfer of the undertaking in question; and has the effect of reducing the duty payable from 4% to 0.5%.

The 2005 rules will require that, for the relief to apply, the relevant undertaking must have as its main activity the carrying on of a trade which does not consist wholly or mainly of dealing in land or interests in land. This measure will greatly reduce the availability of this relief for property transactions.

. Disclosure rules: In 2004, measures were introduced requiring promoters or users of certain schemes to provide details of that scheme or arrangement to the Inland Revenue. Schemes and arrangements could potentially be caught if one of their main benefits might be expected to be a tax advantage. Similar rules apply to certain 'listed' and 'hallmarked' schemes which involve VAT avoidance.

In this year's Budget the rules were extended to SDLT schemes. The rules are intended to apply to schemes or arrangements made available or implemented on or after 1 July which might be expected to provide an SDLT advantage on commercial property transactions in the UK as a main benefit of using the scheme. Transactions may be caught if the property concerned has a market value of at least £5m and is not residential property. Where the promoter is offshore, the scheme was created in-house by the user; or the promoter (being a lawyer) cannot make full disclosure due to legal professional privilege, the user of a scheme will be obliged to provide information about a scheme.

Clearly, the new rules will introduce more red tape at a time when the Government has expressed a commitment to minimise the administrative burden on taxpayers. The stand-off between lawyers and HM Revenue and Customs on the issue of legal professional privilege is also set to continue with these new rules. . Land development tax: Still lurking in the shadows is land development tax. In his 2004 Budget, the Chancellor expressed his general acceptance of the recommendations set out in the Barker Review concerning UK housing stock availability. Among other things, this review recommended that "the Government should use tax measures to extract some of the windfall that accrues to landowners from the sale of their land for residential development".

The review suggests that a "planning gain" supplement be imposed on the granting of planning permission and notes that agricultural land in the southeast of England may be worth as little as £9,122 per hectare as agricultural land, but as much as £2.8m per hectare for development purposes.

Since 2004, there has been little discussion of an introduction of land development taxes, perhaps not surprisingly in an election year. However, the possibility of such a tax being introduced in the next term remains a real one.

Sean Finn is a partner in the international tax group at Lovells.