Everything you need to know about the UK Finance Bill 2025

The UK’s tax landscape faces its most significant overhaul in decades with the new Finance Bill potentially marking the end of non-dom tax status and introducing sweeping reforms to inheritance tax. The changes, set to take effect from April 2025, will replace the centuries-old concept of domicile with a new “long-term UK resident” test, impacting thousands of wealthy individuals and transforming how international wealth is taxed in Britain.

The legislation, published on November 7, introduces a comprehensive new framework where individuals who have been UK resident for at least 10 of the previous 20 tax years will be considered “long-term UK residents.” This replaces the complex domicile rules that have been a cornerstone of UK tax policy since the 19th century.

Most significantly, the remittance basis of taxation will be abolished from 2025-26, meaning that long-term residents can no longer choose to be taxed only on UK income and gains, plus foreign income and gains remitted to the UK. The changes represent a fundamental shift in how the UK taxes its wealthy international residents and sets the stage for broader reforms across the tax system.

Residence and Domicile: A New Era

The abolition of the remittance basis represents the most fundamental change to UK international taxation in recent history. From April 2025, individuals who have been UK resident for any 10 out of the previous 20 tax years will automatically become “long-term UK residents.” This replaces the previous concept of deemed domicile that applied after 15 out of 20 tax years.

Key Changes:

• The remittance basis will not be available for any tax year after 2024-25
• A temporary repatriation facility will allow qualifying overseas capital to be brought to the UK with a reduced tax charge:
  • 12% rate for amounts designated in 2025-26 or 2026-27
  • 15% rate for amounts designated in 2027-28
• Historical protected foreign-source income from 2017-18 to 2024-25 will retain special treatment
• New rules apply to the taxation of offshore trusts with changes to both income and gains treatment

Impact: Long-term UK residents will be taxed on their worldwide income and gains as they arise, regardless of whether funds are brought to the UK. The temporary repatriation facility offers a time-limited opportunity to bring overseas funds to the UK at preferential rates, but careful planning will be needed around the timing and structuring of such remittances.

Employee Ownership Trusts: A New Framework

The Finance Bill introduces fundamental changes to Employee Ownership Trust (EOT) regulations, with new controls focusing on trustee independence and valuation requirements. From October 30, 2024, EOTs must meet stricter governance standards, particularly around trustee composition and market value considerations.

Key Changes:

• All trustees must be UK resident at the time of disposal and remain UK resident for the remainder of the tax year
• Introduction of the “trustee independence requirement” limiting excluded participators to less than 50% of trustees
• New market value cap on consideration with commercial interest rates for deferred payments
• Enhanced reporting requirements including employee numbers and consideration details

Impact: The new independence requirements prevent excluded participators from controlling key trust decisions, including property disposal, trust variations, beneficiary changes, and trustee appointments. Existing EOTs will need to review their structures, while new transactions must be carefully planned around these requirements. The legislation provides a six-month grace period to remedy independence breaches caused by trustee death, recognizing the need for practical flexibility in unexpected circumstances.

Furnished Holiday Lettings: End of Special Status

The Finance Bill announces the abolition of the Furnished Holiday Lettings (FHL) regime, marking the end of beneficial tax treatment for holiday rental properties. This significant change, effective from April 2025, removes a longstanding tax advantage that treated qualifying holiday lets as trading rather than investment properties.

Key Changes:

• Removal of special FHL status from 2025-26 tax year
• Loss of business asset disposal relief for FHL properties
• End of capital allowances advantages previously available to FHL owners
• Properties will be treated as standard residential lettings for tax purposes
• Trading loss relief will no longer be available against general income

Impact: Holiday let owners will see their properties aligned with standard residential lettings for tax purposes. Profits will be treated as property income rather than trading income, restricting loss relief and changing the calculation of capital gains tax. Those currently claiming capital allowances will need to review their position, though transitional provisions protect existing allowances. The changes particularly affect owners who planned to claim Business Asset Disposal Relief on eventual sale, as this valuable 10% rate will no longer be available.

Capital Gains Tax: Rate Rises and Relief Restrictions

The Finance Bill introduces the most significant changes to Capital Gains Tax (CGT) rates since 2010, with substantial increases across all bands from April 2025. The changes also include major reforms to key tax reliefs, particularly affecting business owners and investors planning their exit strategies.

Key Changes:

The basic rate of CGT will rise from 10% to 18%, while the higher rate increases from 20% to 24%. Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) faces a two-stage rate increase – first to 14% in April 2025, then to 18% in April 2026. Investors’ Relief will follow the same pattern, while its lifetime limit drops dramatically from £10 million to £1 million.

Impact: These changes significantly increase the tax cost of asset disposals. For example, an individual selling a business worth £1 million could face an additional £80,000 in tax compared to current rates. The reduction in the Investors’ Relief lifetime limit particularly affects serial investors and business angels. The changes take effect from April 2025, though anti-forestalling provisions apply to certain transactions from October 30, 2024, preventing artificial acceleration of gains to secure lower rates.

Inheritance Tax: Redefining Status and Property Rules

The Finance Bill transforms the Inheritance Tax (IHT) regime by replacing domicile tests with the new “long-term UK resident” concept, aligning IHT with the broader tax residency reforms. This represents the most comprehensive change to IHT’s territorial scope since its introduction.

Key Changes:

For excluded property status, the domicile test will be replaced with the long-term UK resident test from April 2025. Protected status will apply only where the settlor is either not a long-term UK resident at death, or died before April 2025 without UK domicile. The spouse exemption rules also change, with the £325,000 limit now applying to transfers to spouses who are not long-term UK residents, rather than non-domiciled.

Impact: Trusts established by non-UK domiciled individuals before April 2025 retain certain protections, but new arrangements must navigate the long-term resident rules. The legislation includes transitional provisions for pre-existing structures, though careful review is needed to maintain tax efficiency. Foreign property transferred to trusts before October 2024 maintains its excluded property status, provided it remains offshore or comprises qualifying investments.

Research & Development: Northern Ireland and Transitional Changes

The Finance Bill introduces targeted modifications to R&D relief, with particular focus on Northern Ireland companies and refinements to existing transitional provisions. These changes reflect ongoing efforts to balance regional development with anti-avoidance measures.

Key Changes:

Northern Ireland companies face new restrictions on Chapter 2 relief, while being entitled to additional relief only where it qualifies under specified de minimis regulations. The R&D intensity condition receives clarification for the transitional period, with the threshold adjusted to 40% for qualifying companies between April 2023 and April 2024.

Impact: Companies need to reassess their R&D claims, particularly those with Northern Ireland operations. The changes require careful documentation of qualifying expenditure and close attention to the modified intensity conditions during the transitional period.

International Tax: Pillar Two Implementation

The Finance Bill expands the UK’s implementation of the OECD’s Pillar Two framework, introducing the Undertaxed Profits Rule (UTPR) from December 31, 2024. This complements the existing Income Inclusion Rule (IIR), creating a comprehensive minimum tax regime for large multinational enterprises.

Key Changes:

The UTPR will apply where the ultimate parent entity is not subject to an IIR, ensuring a 15% minimum effective tax rate across multinational groups. The legislation includes detailed provisions for calculating untaxed amounts and their allocation to UK entities. Filing requirements and administration of Pillar Two measures are delayed until June 30, 2026, giving businesses time to prepare their systems and processes.

Impact: Multinational groups with annual revenue exceeding €750 million must review their global effective tax rates and prepare for potential top-up tax payments. The rules include complex calculations for substance-based income exclusion and mechanisms for addressing timing differences. Groups need to assess their reporting capabilities and consider the interaction between the IIR and UTPR across their global operations.

Looking Ahead: Implementation and Planning

The Finance Bill 2025 represents the most comprehensive reform of UK taxation in recent history. The changes to residency rules, capital gains tax rates, and trust taxation require careful consideration and planning. Key dates for implementation include:

• October 30, 2024: EOT changes and CGT anti-forestalling provisions
• April 2025: Main implementation date for residency changes, FHL abolition, and IHT reforms
• April 2026: Second stage of Business Asset Disposal Relief rate increases

Many provisions include transitional arrangements protecting existing structures, though these often require specific conditions to be met and maintained. The temporary repatriation facility offers a time-limited opportunity to restructure international arrangements, but careful planning is essential to optimize its benefits.

The removal of long-standing tax frameworks, particularly around domicile and FHL, signals a clear shift toward a more territorial-based system focused on long-term residence. While this may simplify some aspects of tax administration, it creates immediate challenges for those affected by the changes.