The Chancellor has announced drastic changes to the capital gains tax system in his firt pre-budget report .

Alastair Darling's speech brought welcome news on inheritance tax but slashed valuable tax relief for businesses.

But Mr Darling said he was scrapping capital gains tax taper relief in a bid to make private equity firms “pay a fairer share”.

This will mean higher tax bills for farmers, who had been able to enjoy a lower rate of tax on the sale of business assets.

Mike Harrison, partner in accountant Saffery Champness, said farmers who might have anticpated being taxed at 10% on farmland sold for development could now expect to pay the new flat rate of 18%.

"If you sold a parcel of land you'd owned for more than two years, and had farmed it as part of your business, for £100,000 you'd pay £8000 more in capital gains tax."

However, non-business assets (such as let cottages) that had been charged at 24% would now qualify for the lower rate, he added.

Inheritance Tax Threshold Doubled

The inheritance tax threshold will be raised to £600,000 for married couples, and will rise to £700,000 from 2010, Mr Darling said.

The move comes just a week after Tory shadow chancellor George Osborne pledged to raise the inheritance tax bar to £1m at the party’s annual conference in Blackpool.

Inheritance tax is charged at 40% on all assets worth more than £300,000 that someone leaves behind when they die, rising to £350,000 from 2010, although assets left to a spouse are exempt from the tax.

However, the Chancellor's speech also appeared to borrow heavily from his predecessor.

Corporation Tax

For example, his announcement that corporation tax would be cut by 2p to 28p in the pound from April 2008 had been part of Gordon Brown's last budget in March.

Mr Darling also promised to close tax loopholes for so-called “non-domiciles” – people who claim not to be resident here and avoid paying some taxes. He also announced measures to prevent them disguising income as capital.

Reaction

Insurer NFU Mutual welcomed Mr Darling’s move on inheritance tax, saying that it would ease some farmers’ worries.

But inheritance tax specialist Sean McCann added that the treatment of farmland and business assets for inheritance tax purposes had become more complex in recent years as interpretation of the tax rules had been tightened up.

And many farming business would still face a potential inheritance tax liability, he added.