The Finance Act 2025 bundles across-the-board tax increases, international-tax restructuring and targeted industry measures. Key revenue moves include higher capital gains rates for most gains, stepped-up rates for business/investor reliefs, a new 32% rate on carried interest, and a 25% main corporation tax rate for 2026; the Energy (Oil & Gas) Profits Levy is raised and extended while gaining an investment allowance for decarbonisation spend.
The Act also ends the remittance basis and the tax relevance of domicile for income tax and CGT, replacing them with a new “qualifying new resident” relief framework, a temporary repatriation facility (TRF) with a one‑off charge, rebasing for certain overseas assets, and a long‑term UK resident test for inheritance tax. The package creates sizeable new compliance and valuation tasks for advisers, trustees, multinational groups and high‑net‑worth taxpayers while aiming to align UK rules with OECD Pillar Two and raise material revenue from mobile capital.
At a Glance
What It Does
Raises UK capital taxation and business‑relief rates, imposes a 32% rate on carried interest, sets corporation tax at 25% for financial year 2026, increases the oil & gas levy and creates an investment‑linked allowance. It abolishes the remittance basis and replaces domicile tests with long‑term residence rules while introducing targeted reliefs for qualifying new residents and a temporary repatriation facility (TRF).
Who It Affects
High‑net‑worth individuals who used the remittance basis or offshore trust structures; private equity and asset managers (carried interest); trustees and beneficiaries of offshore settlements; multinational groups and in‑scope members under Pillar Two; oil & gas operators; film/TV production claiming expanded VFX credits; purchasers of residential property and private schools.
Why It Matters
It shifts the UK tax base away from domicile‑based carve‑outs toward residence‑and‑source tests, increases taxation on capital and carried interest, and implements OECD Pillar Two operationally. That combination raises near‑term revenue but creates extensive transitional rules and compliance burdens that advisers, corporates and trustees must navigate.
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What This Bill Actually Does
This Act is both a conventional Budget vehicle (rates, thresholds, targeted reliefs) and a structural reform of how the UK treats foreign income, gains and domicile. On rates: capital gains tax rates for non‑residential gains are raised (new baseline rates introduced and effective dates set in the Act), business asset disposal and investors’ reliefs are increased then stepped up again, and carried interest gains are singled out for a higher 32% charge from April 2025.
Corporation tax remains at 25% for the financial year 2026 while the Energy (Oil & Gas) Profits Levy rate is lifted and extended; the Act pairs that levy increase with a generous accounting‑style uplift that treats 66% of qualifying decarbonisation capital spend as incurred for levy purposes.
International tax is a major strand. The Act implements the Undertaxed Profits Rule (UTPR) mechanics and expands the multinational top‑up tax framework to allow allocation of untaxed amounts into the UK; it also makes a slew of OECD‑aligned technical changes (deferred tax, cross‑crediting, blended regimes and safe harbours) to operationalise Pillar Two and to allow the Treasury to specify territories or taxes where necessary.
For payroll, the Act tightens PAYE rules for internationally mobile employees, adds employer notification and HMRC direction mechanisms, and clarifies PAYE on uncertain payments.The most disruptive personal‑tax reform is the end of the remittance basis and the reduced role of domicile. Instead of the remittance basis, the Act creates three parallel claims for qualifying new residents: a foreign income claim, a foreign employment election and a foreign gain claim; each comes with detailed definitions, limits (for example loss and relief interactions), and deadlines for claims.
To manage legacy positions it creates a temporary repatriation facility (TRF): eligible taxpayers may designate qualifying overseas capital in returns for 2025–26 to 2027–28 and pay a single TRF charge (12% for earlier years, 15% if designated in 2027–28) in exchange for exemption from income tax and CGT on designated amounts. The Act also provides rebasing relief for certain overseas assets held on 5 April 2017 and extensive transitional and anti‑forestalling rules to limit abuse.Trusts and inheritance tax are rewritten to match the removal of domicile.
The Act replaces domicile‑based excluded property tests with a “long‑term UK resident” concept for IHT (a 10‑of‑20 years test with special rules for younger people and bodies corporate) and removes many protections that previously sheltered foreign‑source trust income and gains; there are detailed transitional protections for amounts originating in prior years. Taken together, these changes will force trustees and vendors of UK and overseas assets to re‑examine residence, timing and accounting elections and to rework reporting and remittance planning.
The Five Things You Need to Know
The Act abolishes the remittance basis and replaces domicile tests for tax with a new ‘qualifying new resident’ framework and a ‘long‑term UK resident’ definition for IHT (generally 10 of the prior 20 tax years).
Main CGT rates rise for gains other than residential carried interest gains (non‑residential rates changed to 18%/24% depending on banding) with effect for disposals on or after 30 October 2024; business asset disposal and investors’ relief rates are phased up to 18% by 6 April 2026 and the investors’ lifetime limit falls from £10m to £1m.
Carried interest gains are separated and charged at 32% (from 6 April 2025) while other gains for higher‑rate taxpayers are charged at 24% under the new table of rates and allocations.
A Temporary Repatriation Facility (TRF) lets taxpayers who had previously used the remittance basis designate qualifying overseas capital in returns for 2025–26 to 2027–28 and pay a one‑off charge (12% for 2025–26/2026–27 designations, 15% for 2027–28) in return for UK income and CGT exemptions on the designated amounts.
The Act implements UTPR and a domestic allocation mechanism for untaxed Pillar Two amounts, expands technical rules for deferred tax and cross‑border allocations, and introduces transitional safe harbours and elections to smooth application of the OECD Pillar Two rules.
Section-by-Section Breakdown
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Capital gains: higher rates, reliefs tightened and carried interest re‑taxed
Sections 7–12 retune CGT. The general non‑residential rates are moved to higher bands (the Act substitutes 18%/24% benchmarks for non‑residential gains), and provisions remove older residential‑only subsections. Business Asset Disposal Relief and Investors’ Relief rates are raised in two steps (initial bump to 14% for disposals from 6 April 2025, then to 18% from 6 April 2026), and the lifetime cap on gains qualifying for Investors’ Relief is cut from £10m to £1m backdated to disposals from 30 October 2024. Crucially, section 12 creates a separate 32% capital gains rate specifically for carried interest gains accruing on or after 6 April 2025 and adjusts the income‑tax pairing rules so carried interest is carved out from the ordinary basic‑rate band allocation mechanics.
Corporation tax, small‑profits rates and a beefed‑up oil & gas levy with decarbonisation relief
The Act sets the main corporation tax rate at 25% for financial year 2026 and confirms the small‑profits fraction and marginal relief for that year. For the oil & gas sector, the Energy (Oil & Gas) Profits Levy increases from 35% to 38%, is extended to accounting periods through 2030, and receives a new investment treatment: qualifying de‑carbonisation capital expenditure counts as 166% (company treated as having incurred an additional 66%) for levy‑relief purposes. The schedule also includes transitional apportionment rules for straddling accounting periods and instalment‑payment adjustments to accommodate the uplift.
Pillar Two: UTPR mechanics and domestic allocation
Schedule 4 expands the multinational top‑up tax architecture to implement the Undertaxed Profits Rule (UTPR). It adds a new Chapter 9A that (1) identifies ‘potentially undertaxed’ members, (2) defines ‘untaxed amounts’, and (3) sets out a formulaic UK allocation using employees and tangible asset apportionment. The Schedule also inserts a number of operational provisions — cross‑border deferred tax and DTL recapture methodologies, treatment of flow‑through entities, blended CFC adjustments and transitional safe harbours — that materially change compliance and reporting for groups subject to Pillar Two.
Abolition of the remittance basis; new qualifying‑new‑resident claims and transitional rules
Part 2 repeals the remittance basis for tax years from 2025‑26 and replaces it with a set of targeted claims and elections for individuals returning after long non‑residence: a foreign income claim, a foreign employment election and a foreign gain claim. Each claim has tightly drafted scope, time limits (claims must be made within 12 months after 31 January following the tax year) and interaction rules with allowances, pension relief and loss relief. The Act limits personal allowances and other reductions in years where such claims apply and lays out anti‑avoidance rules for artificial arrangements and associated employments. Schedule 8 contains consequential PAYE and transitional provisions — including employer notification/direction rules for internationally mobile employees — and Schedule 9 contains a package of anti‑forestalling and rebasing transitional provisions for disposals and reorganisations.
Temporary Repatriation Facility (TRF): designation, charge and exemptions
Schedule 10 creates the TRF. Eligible individuals who were remittance‑basis users may elect in their 2025–26, 2026–27 or 2027–28 return to designate qualifying overseas capital and pay a one‑off TRF charge (12% for designations in the first two years, 15% in 2027–28). Designated capital is then treated as exempt from UK income tax and CGT, and the Schedule sets tight drafting tests for what qualifies (capital/gains/income arising in earlier tax years, matching with trust capital, timing rules) and extensive charging/collection rules (TRF charge is collected like income tax). The Schedule also defines mixed‑fund, TRF capital accounts and remedies for breaches (30‑day correction windows).
Inheritance tax: long‑term UK resident replaces domicile test and connected changes
Sections 44–46 remove domicile as the key IHT trigger and replace it with a long‑term UK resident test for excluded property and settled property rules. A long‑term UK resident is defined by reference to 10 of 20 tax years (with graduated rules for younger persons and bodies corporate). The Act rewrites excluded‑property tests, alters treatment of settled property, adds transitional and consequential provisions, and adjusts reliefs like agricultural property relief to accommodate environmental management agreements. The change shifts the perimeter of IHT exposure from domicile to a measurable residence‑history test.
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Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- UK Exchequer — by design: higher CGT, carried interest and energy levy rates and the TRF charge are all explicit revenue‑raisers that broaden tax collected from mobile capital and extract value from the oil & gas sector and real‑estate transactions.
- Qualifying new residents (defined narrow cohort) — the new foreign income, employment and gain claims let many incoming UK residents shelter certain foreign income/gains under defined limits and with clear claim processes, replacing the blunt remittance basis with targeted relief conditional on claim specifics.
- Film and visual‑effects production companies — the Act introduces an enhanced VFX-specific audiovisual expenditure credit (an additional 39% mechanism subject to cap treatment), strengthening UK incentives for VFX work and post‑production activities.
- Companies investing to decarbonise upstream oil & gas — the levy relief treats 66% of qualifying decarbonisation capital as incurred, materially reducing the effective levy cost of sanctioned low‑carbon investment.
- HMRC’s Pillar Two implementation: multinationals that qualify for transitional safe harbours and elections gain certainty and simplified routes to compliance (conditional on the elections).
Who Bears the Cost
- High‑net‑worth individuals and owners of offshore structures — abolition of the remittance basis, rebasing changes and the TRF charge remove longstanding tax arbitrage routes and increase tax on cross‑border private wealth.
- Private equity and asset managers — the 32% carried interest rate (plus higher CGT on many gains) materially raises tax bills for carried interest beneficiaries and changes valuation/timing strategies.
- Oil & gas companies — higher Energy Profits Levy (38%) expands the near‑term tax take; while decarbonisation relief offsets some cost, the net levy is nevertheless heavier and alters project economics.
- Private schools and parents — the Act removes the VAT exemption for private school fees (with targeted exceptions) and adds a pre‑payment charge rule, increasing costs or compliance for independent education providers and families.
- Large multinational groups and their tax teams — Pillar Two expansions, UTPR allocation formulas, deferred tax and cross‑border methodologies significantly increase compliance scope and reporting complexity.
Key Issues
The Core Tension
The Act confronts a classic trade‑off: raise significant revenue from mobile capital and wealthy taxpayers (through higher CGT, carried interest tax and the TRF) while avoiding damage to the UK’s attractiveness for investment and creating administrable, fair rules; ending domicile‑based privileges increases perceived fairness but amplifies complexity and transitional hardship for people and structures that planned under the old rules.
The Act is dense with transitional carve‑outs and phased dates; that reflects an attempt to limit windfalls and forestall last‑minute planning, but it leaves substantial implementation complexity. Abolishing the remittance basis and substituting a claim‑based relief regime plus TRF creates valuation and matching problems: identifying qualifying overseas capital, establishing whether a prior remittance would have given rise to a charge absent TRF, and calculating how earlier trust distributions interact with rebasing all require new HMRC guidance and systems.
The TRF in particular raises valuation questions (what is the base for the one‑off charge), mixed‑fund accounting rules, and records/nomination mechanics for TRF capital accounts that are open to operational error and litigation.
On Pillar Two, the Act imports many OECD methodologies by reference and delegates technical detail to regulations and guidance. That is practical — it allows the UK to track OECD administrative practice — but it concentrates enormous complexity in subordinate instruments, leaving multinationals dependent on later regulations to understand final mechanics (deferred tax allocation, DTL recapture, blended CFC calculations).
For trusts and IHT, replacing domicile with a long‑term residence test corrects perceived fairness issues, but it raises difficult boundary questions (what counts as a year of residence for periods decades old, how elections interact with cross‑border pensions and treaty rules) and creates potential traps for estates with mixed‑jurisdiction property. Enforcement will require fresh HMRC capabilities: cross‑border information, treaty engagement and resources to audit complex remittance/matching chains.
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