The new governments announcement that they intend to increase capital gains tax from 18 percent to 40 percent is going to hit individual investors in buy to let properties.

The British Property Federation (BPF) has reacted to the news by calling for target rollover relief from this doubling of the tax and also for the formation of residential real estate investment trusts (Reits), which were introduced for commercial property in 2007.

Liz Peace, chief executive of the BPF, said: Buy to let landlords and individual investors will bear the brunt of this 22 percent tax rise and while the public at large may have little sympathy with those profiting from property sales, ministers must recognise the massive contribution that these people have made to housing supply over the last decade.

Over a million more people rent now than in 2001 and this has been made possible through buy to let investment.

The government must to look to nurture new investment streams into housing through residential Reits and from the institutions. This will mean reforming tax rules, incentivising large-scale investment from institutions and changing the Reit structure to allow housing vehicles to form.

Ministers should also look to introduce a targeted rollover relief from these changes for investors who keep their money in housing.

If the right residential Reit or other collective investment vehicle could be formulated, offering deferral of tax to anyone selling a property into the vehicle in return for an interest in it, this could be a way of encouraging greater liquidity in rented housing.

Capital gains from the sale of residential property must be included in the generous exemptions if CGT is increased, says the National Landlords Association (NLA). The David Salusbury, Chairman, NLA, said:

When landlords let property they are running a lettings business. We are calling on the Government to ensure profits from this business activity are included as part of the exemptions.

We are concerned that a tax increase of this nature will act as a barrier to further investment in residential property just at a time when there is an urgent need for more housing.

The NLA will be doing everything we can to ensure that landlords activity is considered to be business activity for the purposes of CGT. The law of unintended consequences should be considered here.

Lucian Cook, director of Savills residential research said: The expected changes to capital gains tax legislation will particularly impact higher income tax rate paying investors and second home owners.

Investors looking to rationalise or reorganise their property portfolio, particularly those who have already seen good capital growth, could avoid a hefty tax burden by disposing of their asset before April 2011.

This would include those who have bought investment property as a pension pot; some of whom may now be tempted to sell and invest in other asset classes.

Bringing forward sales of this type could distort some local markets at a time when the early stage recovery is already looking fragile.

The higher tax liability will make property investment less tradable, which in turn may limit the flow of second homes and existing investment stock to the market after next April.

There is no indication that principal private residence relief will be affected, meaning that for most owner occupiers the change in CGT rates will have little or no effect.

However, some owners who have occupied their property for only part of their period of ownership face an increased tax bill when they come to sell.

In the past indexation or taper relief has been available to mitigate the pain of capital gains tax. It will be interesting to see what replaces it, to avoid investors and second home owners being charge a tax on inflation.