Investors who receive loan notes rather than cash when they dispose of shares could end up having to borrow to pay tax following capital gains tax changes announced in Wednesday's Budget, writes Jane O'Sullivan, Markets Correspondent.

Although the Minister for Finance, Mr McCreevy, left the capital gains tax rate unchanged at 20 per cent, he introduced a number of measures related to the tax, including earlier deadlines for payment.

The changes also mean it will no longer be possible to defer capital gains tax on share disposals by taking the proceeds in the form of loan notes.

The sale of company shares or the takeover of a company often involves the issue of debentures or loan notes to the departing shareholders. Under the old rule, shareholders did not have to pay tax until the notes were redeemed for cash.

"The relief now being cancelled did no more than recognise that it is difficult to pay tax on a transaction which does not generate cash," said Mr David Kennedy, tax partner with KPMG. He added that the move could leave investors facing a cash liability without the cash to pay for it.

Dunloe Ewart is the latest Irish company to have signalled that it will offer a loan note alternative to shareholders as part of the takeover by Mr Liam Carroll.

Sources close to the company said the offer would go ahead on the same basis as it had been set out but the loan alternative would probably not be as attractive to shareholders as in the past.

However, Mr Carroll, who has already indicated his intention to take loan notes in respect of his 29.9 per cent shareholding in the company, will proceed with the take-up of the notes as planned.

The change could also make it more difficult for companies not in a position to pay a full cash consideration upfront to structure deals, according to tax experts. Such deals can involve the use of an earn-out structure, for example, with later payments governed by a loan note.

"The change will reduce the financing options open to a purchaser in relation to the financing of corporate acquisitions," Mr Kennedy said.

Other capital gains tax measures announced on Wednesday include the abolition of roll-over relief on capital gains arising from disposals. Indexation of the base for computation of capital gains can only be calculated up to December 31st, 2002.

The changes, which will broaden the capital gains tax base, will bring in about €20 million in 2003 and €100 million in a full year.

"It's an opportune move to generate another bit of revenue in a tight fiscal environment," one tax expert said.

The timing of capital gains tax payments has also been put on a similar footing to other tax payments. In the past, capital gains tax was payable on a preceding year basis.

The timing changes will result in an estimated once-off gain of €250 million for the Exchequer next year.