The Government has abolished plans to penalise landowners who fail to put sites zoned for residential development onto the market.

But the Economic & Social Research Institute (ESRI) warned last night that the move would push up land prices this year and general property prices as a result.

Any land zoned residential, sold after April 6th, 2002, was to have had a rate of 60 per cent capital gains tax (CGT) applied as part of a drive to boost residential development and ease the property price spiral.

But the Finance Bill, published by the Minister for Finance yesterday, removes this incentive to sell land before the April 2002 deadline. Instead, all disposals of land will now incur a 20 per cent rate no matter when they are sold.

Mr John FitzGerald, research professor at the ESRI, warned last night that removing this strong incentive to sell would lead to "significant rises in prices this year".

The provision for the 60 per cent CGT was introduced following the recommendation of the first Bacon report on housing and was designed as a "stick" approach to increase the supply of residential development land for housing.

But Mr McCreevy said yesterday that the threat of facing the higher rate of CGT had done its work. "Land has come on stream. It has served its purpose," he said. He added that there were now thousands of planning permissions.

Department of Finance officials said that if the penalty was not abolished, landowners would have had an incentive to sell their land for commercial, rather than residential, development if the necessary change in zoning could be achieved within county guidelines. The higher rate of CGT would not have applied to land zoned commercial.

But Mr Martin Walsh, head of lending at EBS, argued that "in recent months there was an increase in the supply of zoned building land coming onto the market".

He added: "Small and all as this was, it was a welcomed development. It is to be hoped that this fiscal change will not contribute to a further reduction of supply of building land."

The Labour party finance spokesman, Mr Derek McDowell, criticised the move. "When Minister McCreevy slashed CGT to 20 per cent on foot of the Bacon report he made a commitment to bring the tax back up after 2002. He has now abandoned his intentions. This is another winner for the speculators and those who have been hoarding development land, thereby increasing house prices." The Finance Bill will also introduce measures to allow people to rent out rooms and divorcing couples to buy second homes without incurring the 2 per cent anti-speculative tax.

Other measures which many investors had been hoping would allow them to offset rental income against interest payments are not included.