The UK’s tax landscape is facing the most significant overhaul in decades. new Finance Bill potentially marking the end of non-dom tax status and introducing sweeping reforms to inheritance tax. The changes, which will come into force from April 2025, will replace the centuries-old concept of residence with a new “long-term UK residence” test, affecting thousands of wealthy individuals and changing the way international wealth is taxed in Britain.

The legislation, published on 7 November, introduces a comprehensive new framework under which individuals who have been resident in the UK 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 importantly, the remittance basis in taxation will be abolished from 2025-26; This means long-term residents can no longer choose to be taxed solely on UK income and gains, as well as foreign income and gains remitted to the UK. The changes represent a fundamental shift in the way the UK taxes its wealthy international residents and sets the stage for wider reforms across the tax system.

Residence and Residence: A New Era

The removal of the remittance basis represents the most fundamental change in UK international taxation in recent history. From April 2025, people who have been resident in the UK for 10 of the previous 20 tax years will automatically become “long-term UK residents”. This replaces the previous concept of residence recognition which applied after 15 of the 20 tax years.

Key Changes:

• Remittance basis will not be available for any tax year after 2024-25.
• A temporary repatriation facility will allow eligible overseas capital to be brought into the UK at a reduced tax charge:
  • 12% rate for amounts determined in 2025-26 or 2026-27
  • 15% rate for amounts determined in 2027-28
• From 2017-18 to 2024-25, foreign source income under historical protection will receive special treatment
• New rules apply to the taxation of offshore trusts, with changes to the treatment of both income and gains

Coup: Long-term UK residents will be taxed on their worldwide income and gains, regardless of whether the funds are brought into the UK. The provisional repatriation facility provides a time-limited opportunity to bring overseas funds into the UK at preferential rates, but careful planning will be required in 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 30 October 2024, EOTs must meet stricter governance standards, particularly on matters of trustee board composition and market value.

Key Changes:

• All trustees must be resident in the UK at the time of winding up and remain resident in the UK for the remainder of the tax year.
• Introducing a “trustee independence requirement” that limits excluded participants to less than 50% of the board of trustees.
• New market value ceiling for deferred payments to be taken into account together with commercial interest rates
• Advanced reporting requirements, including employee numbers and details taken into account

Coup: The new independence requirements prevent excluded participants from controlling important trust decisions, including property dispositions, trust changes, beneficiary changes, and trustee appointments. While existing EOTs need to review their structure, new transactions need to be carefully planned around these requirements. Recognizing the need for practical flexibility in unexpected circumstances, the legislation provides for a six-month grace period to remedy breaches of independence arising from the death of a trustee.

Furnished Holiday Rentals: End of Special Status

The Finance Bill announces the abolition of the Furnished Holiday Letting (FHL) regime, marking the end of favorable tax treatment for holiday rental properties. This significant change, effective from April 2025, eliminates the long-standing tax advantage of treating qualified holiday leave as business rather than investment property.

Key Changes:

• Removal of special FHL status from tax year 2025-26
• Business asset loss disposal assistance for FHL properties
• End of capital allowance benefits previously offered to FHL holders
• Real estate will be considered as standard residential rentals for tax purposes.
• Commercial damage compensation will no longer be enforceable against general revenue

Coup: Holiday permit holders will find that their property qualifies for standard residential lettings for tax purposes. Profits will be treated as property income rather than business income, loss deduction will be restricted and the capital gains tax calculation will be changed. Although transitional provisions maintain existing allowances, those currently claiming capital allowances will need to review their situation. The changes particularly impact owners who plan to claim Business Asset Disposal Reduction on final sale, as this valuable 10% will no longer apply.

Capital Gains Tax: Rate Increases and Deduction Restrictions

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

Key Changes:

The basic rate of CGT will increase from 10 per cent to 18 per cent, and the top rate will increase from 20 per cent to 24 per cent. Business Asset Disposal Relief (formerly Entrepreneurs’ Relief) faces a two-stage increase: first to 14% in April 2025, then to 18% in April 2026. Between £10 million and £1 million.

Coup: These changes significantly increase the tax cost of disposing of assets. For example, a person selling a business worth £1 million could face an additional £80,000 in tax compared to current rates. The reduction in the life limit of Investor Assistance particularly affects serial investors and business angels. The changes will come into force from April 2025, but anti-forestry provisions apply to certain transactions from 30 October 2024, preventing profits from being artificially accelerated to secure lower rates.

Inheritance Tax: Redefining Status and Ownership Rules

The Finance Bill transforms the Inheritance Tax (IHT) regime by replacing the residence tests with the new concept of “long-term UK resident” and brings IHT in line with wider tax residence reforms. This represents the most comprehensive change to IHT’s regional coverage since its introduction.

Key Changes:

For excluded property status, the residence test will be replaced by the long-term UK residence test from April 2025. Protected status will only apply where the settlor was not a long-term resident of the UK at the time of death or died without being UK before April 2025. place of residence. Spouse exemption rules are also changing; The £325,000 limit now applies to transfers to spouses who are not resident in the UK for a long time, rather than to non-domiciled spouses.

Coup: Trusts established by non-UK residents before April 2025 retain certain protections, but long-term residence rules require new adjustments. The legislation includes transitional provisions for pre-existing structures; however, careful review is required to maintain tax efficiency. Foreign property transferred to trusts before October 2024 retains its status as excluded property, provided it remains offshore or contains qualifying investments.

Research and Development: Northern Ireland and Changes in Transition

The Finance Bill introduces targeted changes to R&D aid, focusing specifically on Northern Ireland companies and making improvements to existing transitional provisions. These changes reflect ongoing efforts to balance regional development with anti-avoidance measures.

Key Changes:

While Northern Ireland companies face new restrictions on Part 2 relief, they are only entitled to additional relief if they comply with certain de minimis regulations. The R&D intensity requirement is clarified for the transition period, with the threshold set for eligible companies at 40% between April 2023 and April 2024.

Coup: Companies, particularly those with Northern Ireland operations, need to re-evaluate their R&D claims. The changes require careful documentation of eligible expenditures and close attention to changing density conditions during the transition period.

International Tax: Second Block Application

The Finance Bill extends the UK’s application of the OECD’s Second Pillar framework by introducing the Untaxed Profits Rule (UTPR) from 31 December 2024. This complements the existing Income Inclusion Rule (IIR), creating a comprehensive minimum tax regime for large multinational corporations.

Key Changes:

The UTPR will apply where the ultimate parent is not subject to an IIR and provides for a minimum effective tax rate of 15% across multinational groups. The legislation contains detailed provisions regarding the calculation of untaxed amounts and their allocation to UK entities. Application requirements and management of the Pillar The two measures have been postponed until 30 June 2026, giving businesses time to prepare their systems and processes.

Coup: Multinational groups with annual revenues exceeding €750 million need to review their global effective tax rates and prepare for possible additional tax payments. The rules include complex calculations for excluding itemized income and mechanisms to address timing differences. Groups need to evaluate their reporting capabilities and consider the interaction between IIR and UTPR in their global operations.

Looking Ahead: Implementation and Planning

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

• 30 October 2024: EOT changes and CGT anti-forestry provisions
• April 2025: Main implementation date of residence changes, removal of FHL and IHT reforms
• April 2026: Second phase of Business Asset Disposal Relief increases

Most provisions include transitional regulations that preserve existing structures; but these often require certain conditions to be met and maintained. Temporary repatriation offers a time-limited opportunity to restructure international regulations, but careful planning is essential to maximize its benefits.

The removal of long-standing tax frameworks, particularly around residence and FHL, signals a clear shift towards a more territorially based system focused on long-term residence. Although this simplifies some aspects of tax administration, it creates immediate challenges for those affected by the changes.