The emotive issue of rising house prices has moved rapidly up the political radar screens in recent months. But even expert observers were stunned at the speed at which the Government moved to implement the tax proposals contained in the Bacon Report.

The tax recommendations themselves vary in terms of their likely effectiveness (and popularity!) and, in some cases, are radical. The importance of the issue, however, can be gauged by the fact that the proposed changes go even further than the Bacon proposals in some instances. They will necessitate a special Finance Bill to be introduced by the Minister for Finance, Mr McCreevy, which is expected in the next two weeks. There is no doubt that the changes will fundamentally impact on the housing market in the next few months and beyond.

The main changes are as follows:

Stamp Duty

The changes announced by the Government have gone beyond the proposals of the Bacon report.

Owner/Occupiers

With effect from Thursday, new low rates of stamp duty are now being introduced on second-hand residential properties for all buyers, broadly in line with the Bacon recommendations.

No duty will now be charged on properties under £60,000 and on higher value properties the rates - which are charged on the full purchase price - will be 3 per cent ( on properties valued between £60,001 and £100,000), 4 per cent (£100,001 to £170,000), 5 per cent (£170,001 to £250,000), 7 per cent (£250,001 to £500,000) and 9 per cent on more expensive homes.

New houses will be exempt from stamp duty for all buyers.

The proposed change is costed by Bacon at £75 million, to be partially financed by some of the other tax changes. One would wonder whether a more radical change in the stamp duty regime - creating a two-tier scheme with a 0 per cent rate for first-time buyers (only) on second-hand houses up to say £150,000 - might be necessary to achieving the desired objective.

Rental Residential Property

The purchase of second-hand rental residential property will also benefit from the reduction in stamp duty rates outlined above. This is somewhat surprising, given the overall thrust of the stamp duty changes.

A new change (not recommended by Bacon) is that newly-built apartments/houses used for rental purposes will for the first time be subject to stamp duty at the new rates from this week. This will become a serious cost factor to investors buying up new developments for rental purposes. A new requirement has been introduced for owner/ocupier's to state in writing to the Revenue that they propose to reside in any new property. If the property is let within five years the amount of stamp duty that would have been paid initially then becomes payable.

Non-Residential Property

Land and non-residential property will continue to attract stamp duty at their existing rates (i.e. 0 per cent to a maximum of 6 per cent).

Section 23 Investments

This relief was first introduced in 1981 and was designed to increase the size and quality of the Irish rental property pool. It allowed investors to write-off the cost of new houses or apartments (within a specified size), which were let for 10 years, against their rental income.

The relief has been significantly restricted since 1992. The Bacon report proposes that it be abolished with immediate effect.

The rationale for this recommendation, particularly in the Dublin area, seems difficult to fault, with a high number of new developments taken up by investors availing of the tax break.

The Government has partially accepted the Bacon proposal by saying the relief will remain, but will become much more targeted, applying only in areas where an Integrated Area Plan exists and it can be shown that the Section 23 relief is necessary for its achievement.

While the partial implementation of this recommendation might appear to be a bold stroke, it will probably have limited effectiveness as the existence of the relief only distorted the market in favour of investors over home owners in quite specific areas of the country i.e. designated areas.

Capital Gains Tax

One of the more controversial elements of the last Budget was the halving of capital gains tax to 20 per cent. However, the rate on "development" land (essentially undeveloped land where the value is reflected in planning permission or the hope of it) was kept at 40 per cent.

The report in effect proposes a type of "amnesty" whereby the capital gains tax on the sale of serviced land, which has been zoned residential, would be halved to 20 per cent - but only for a period of four years.

This proposal has been accepted by the Government with immediate effect. The report suggests this would cost approximately £26 million and encourage the supply of serviced land in this four-year period. The economic logic of the argument appears quite valid. However, the idea of significantly reducing tax on disposals by large land owners is likely to exercise opposition from some quarters.

Interest Relief For Investors

This is probably the most radical tax proposal in the report which will alter a fundamental aspect of the taxation of rental income.

Currently an investor can offset his or her entire interest expense on the acquisition of an investment property against the rental income. This means that, in the early years, usually no income tax is paid as the interest "swamps" the rent. By the time tax does come to be paid on the rental profit, the property has appreciated, the debt is being paid down and the investor is "over the worst".

The Bacon report quite simply proposed that no interest deduction be given on borrowings for residential investment property and that in effect investors will suffer income tax on their gross rents from such property. The move is clearly designed to make returns from investment properties a less lucrative proposition. The Government have accepted this recommendation fully, but it will not apply retrospectively.

Feargal O'Rourke is a tax partner with Price Waterhouse