Finance Bill 2025: What you need to know about the tax changes
The UK Finance Bill 2025, introduced in November 2024, is changing the financial landscape. It represents the most significant changes to Capital Gains Tax (CGT) rates since 2010 and outlines a series of reforms that will affect individuals, businesses, and investors across the UK. Understanding these changes is essential for managing taxes and making smart financial choices. This blog dives deep into the key aspects of the UK Finance Bill 2025.
A shift in taxation for non-dom residents
Starting April 2025, the UK will stop using the remittance basis of taxation. A new residency test will be introduced. This means that long-term residents in the UK will no longer be able to choose to be taxed only on their UK income and gains, as well as foreign income and gains brought into the UK. Instead, they will be taxed on their income and gains from all over the world. This signifies a fundamental shift in how the UK taxes its wealthy international residents and could pave the way for further tax system reforms.
Impact on business owners and investors
The Bill also introduces major reforms to key tax reliefs, particularly impacting business owners and investors planning exit strategies. Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) will face a two-stage rate increase—from 14% in April 2025 to 18% in April 2026. Investors’ Relief follows the same pattern, with its lifetime limit dropping dramatically from £10 million to £1 million. These changes significantly increase the tax cost of asset disposals.
Furnished holiday lettings:
The Finance Bill marks the end of the special Furnished Holiday Lettings (FHL) regime, a significant shift for property investors. From the 2025-26 tax year, holiday lets will be treated as standard residential lettings.
Key changes:
- Loss of FHL status: Holiday lets will no longer qualify for the favourable tax treatment previously afforded to trading businesses.
- Removal of Business Asset Disposal Relief (BADR): Owners will lose the ability to claim BADR on the sale of FHL properties, significantly increasing the CGT burden.
- Restricted capital allowances: The advantages previously available to FHL owners regarding capital allowances will be eliminated.
- Property income treatment: Profits from holiday lets will be treated as property income rather than trading income, which will impact loss relief and CGT calculations.
Impact:
- Increased tax burden: Owners will face higher tax liabilities due to the loss of BADR and the shift to property income treatment.
- Planning challenges: Investors will need to reassess their investment strategies, considering the impact of these changes on profitability and long-term returns.
Capital Gains Tax: Substantial increases and relief restrictions
The Finance Bill introduces the most significant changes to CGT rates since 2010.
Key changes:
- Rate increases: The basic rate of CGT jumps from 10% to 18%, and the higher rate increases from 20% to 24%.
- BADR and Investors’ Relief Changes: BADR undergoes a two-stage rate increase, reaching 18% by April 2026. Investors’ Relief faces a similar rate increase and a dramatic reduction in its lifetime limit from £10 million to £1 million.
Impact:
- Higher tax costs: Individuals and businesses selling assets, particularly businesses and significant investments, will face significantly higher tax bills.
- Reduced investment incentives: The changes to BADR and Investors’ Relief may discourage investment and entrepreneurial activity.
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Inheritance tax: Redefining residency and property rules
The Finance Bill introduces a new “long-term UK resident” concept for inheritance tax (IHT), replacing the previous domicile-based rules.
Key changes:
- Domicile test replaced: The domicile test for excluded property status was replaced in April 2025 by the long-term UK resident test.
- Spouse exemption limits: The £325,000 spouse exemption limit now applies to spouses who are not long-term UK residents.
- Transitional provisions: Trusts established by non-UK domiciled individuals before April 2025 retain certain protections, but new arrangements must comply with the new rules.
Impact:
- Increased IHT liability: Non-UK domiciled individuals who become long-term UK residents may face increased IHT liabilities.
- Trust planning complexity: Trusts established by non-UK domiciled individuals will need to be reviewed to ensure compliance with the new rules.
Research & Development: Northern Ireland focus and transitional clarifications
The Finance Bill introduces targeted modifications to R&D relief, focusing on Northern Ireland and refining existing transitional provisions.
Key changes:
- Northern Ireland Restrictions: Northern Ireland companies face new restrictions on Chapter 2 relief, with eligibility tied to specific de minimis regulations.
- R&D Intensity Clarification: The R&D intensity condition for the transitional period has been clarified, and the threshold for qualifying companies has been adjusted to 40%.
Impact:
- Northern Ireland companies affected: Companies with operations in Northern Ireland must carefully assess how these changes impact their R&D claims.
- Documentation and compliance: Businesses need to maintain accurate documentation of qualifying R&D expenditures to ensure compliance with the modified rules.
Other key measures
While CGT reforms take centre stage, the Finance Bill 2025 encompasses other noteworthy measures, including:
- Legislation for the OECD Crypto-Assets Reporting Framework (CARF): This empowers the Treasury to implement the CARF framework within the UK, signifying a move towards greater regulation of the cryptocurrency market.
Implications and next steps
The Finance Bill 2025 marks a significant shift in the UK’s tax landscape. Individuals, businesses, and investors should carefully assess the impact of these changes on their financial planning. Here are some steps you can take:
Review your tax strategy:
Consult with a tax advisor to understand how the new CGT rates and reliefs affect your specific situation.
Plan for higher tax costs:
If you plan to sell assets soon, factor in the increased CGT rates when estimating your tax liability.
Explore alternative exit strategies:
Business owners and investors may need to explore alternative exit strategies with potentially lower tax implications.
Stay informed:
Keep yourself updated on further developments as the Finance Bill progresses through Parliament. You can access the Bill and its explanatory notes on the UK Parliament website.
Conclusion
The UK Finance Bill 2025 ushers in a new era for taxation, particularly with regard to CGT. While the full impact of these changes is yet to be seen, it’s clear that individuals and businesses need to adapt their financial strategies accordingly. By staying informed, consulting with a tax advisor, and actively planning, you can easily navigate these changes and minimise potential tax burdens.
If you need more help, feel free to connect with us, and we will help you from there.
