New Finance Act scraps non-dom tax status and VAT exemption for school fees

Finance Act 2025 makes major changes to the tax rules for ‘non-doms’ (those resident in the UK but not permanently domiciled here), removes the VAT exemption for private school fees, increases some rates of capital gains tax and stamp duty land tax, and extends the energy profits levy on the oil and gas sector. 

Non-dom changes mean long-term residents face UK tax on worldwide income  

The most significant measure in the Act is abolition of the remittance basis of taxation for non-UK domiciled individuals, replacing it with a residence-based regime with effect from 6 April 2025. This means all longer-term UK residents will be taxed by the UK on their worldwide income and gains as they arise, rather than (for some non-doms) only when the income and gains are brought into the UK. A Temporary Repatriation Facility will enable former remittance basis users to bring capital representing previous years’ foreign income and gains into the UK with a reduced tax charge. There will also be a new residence-based system for inheritance tax.  New arrivers to the UK will benefit from up to four years of tax exemption on their foreign income and gains. 

Commenting, John Barnett, chair of CIOT’s Technical Policy and Oversight Committee, said: 

“This is a huge change in how the UK treats international taxation. 

“Moving from domicile to residence as the basis for taxing people who are internationally mobile makes sense. As well as being a major simplification, it is a fairer and more transparent basis for determining UK tax.  Residence is determined by criteria far more objective and certain than the subjective concept of domicile.  Replacing the outdated remittance basis is also sensible and the Temporary Repatriation Facility offers a helpful transition. 

“Bringing long-term residents and their trusts into UK inheritance tax is more controversial.  Inheritance tax does not raise particularly large sums for the government. But it potentially has a very big behavioural impact on those affected. 

“We are also concerned that this legislation is poorly drafted in places and has been rushed through without adequate scrutiny when a proper consultation on the remittance basis would have produced a better outcome.  Whether four years is sufficiently attractive for new arrivers, particularly when a number of other countries offer much longer periods, remains to be seen.” 

VAT introduced on school fees 

The Act removes the VAT exemption on the supply of private school fees, vocational training and, board and lodgings when supplied by a private school or similar institute. This is the most contentious measure in the Act, with the opposition parties attempting to remove these clauses at committee and report stage. 

Commenting, Ellen Milner, CIOT Director of Public Policy, said: 

“This is a significant change which has required private schools to undertake reviews and make big changes to their tax, accounting and operational practices in a very short space of time. It would have been better had it not taken effect until the start of the next school year.” 

Higher tax on most capital gains  

The Act increases the main rates of capital gains tax (CGT) from 10% and 20% to 18% and 24% respectively for disposals made on or after 30 October 2024 (equalising them with rates for residential property which are unchanged). It increases the rates for gains which qualify for Business Asset Disposal Relief and Investors’ Relief from 10% to 14% from 6 April 2025 and to 18% from 6 April 2026, and the rate for carried interest to a single rate of 32%, again from 6 April 2025. It reduces the lifetime limit for Investors’ Relief from £10 million to £1 million, from 30 October 2024. 

Commenting, John Barnett, chair of CIOT’s Technical Policy and Oversight Committee, said: 

“These are pragmatic increases. More than most taxes, CGT rates have a major behavioural effect with people simply deciding not to transact if the post-tax return is too low. That – and the fact that CGT ignores the impact of inflation – is why governments have generally kept CGT rates below those for income tax.  

“It will be important to study closely the impact of these changes on revenue.  However, patience will be needed. Short-term behavioural effects make it hard to judge the impact of changes until some years afterwards.”  

Landlords lose tax advantages

The Act makes a number of significant changes to property taxation, including abolishing the furnished holiday lettings (FHL) regime with effect from next month. The current FHL regime means that qualifying holiday lets are treated as a trade for certain tax purposes giving them a tax advantage over non-FHL property businesses. The Act also increases residential rates of stamp duty land tax (SDLT) for purchase of additional dwellings and purchases by companies.

Commenting, Ellen Milner, CIOT Director of Public Policy, said:

“Removing the complexities of the furnished holiday lettings regime brings some benefits in terms of simplification of the taxation of rental properties. However, we are concerned that abolition reopens the dividing line between a trading and an investment (letting) business and may lead to costly disputes and litigation about where the line is drawn. We support a statutory ‘bright line’ test to remove uncertainty.

“The SDLT increases add to the existing divergence between residential and non-residential and mixed use SDLT rates, that incentivises taxpayers to argue the property they are buying fits into the last two categories. This potentially adds to HMRC’s compliance costs. There are grounds for reconsidering alternatives to the current approach for calculating SDLT for mixed use properties, such as introducing an apportionment system.”

Oil and gas ‘windfall tax’ extended

The Act extends the duration and increases the rate of the Energy Profits Levy (EPL), while reducing the generosity of allowances. The EPL was introduced in May 2022 to tax the ‘extraordinary profits’ of oil and gas companies operating in the UK or the UK Continental Shelf. It was introduced as a ‘time-limited windfall tax’.

Commenting, Ellen Milner, CIOT Director of Public Policy, said:

“These changes to the EPL are the latest in a series of changes to the tax since it was introduced in May 2022. For an industry that is notable for the long-term nature of its investments, these frequent changes undermine fiscal stability, and make the UK a more challenging place in which to invest.

“For this reason, we welcome the current consultation on a successor regime and hope that it results in a move towards stabilising the long-term regime and giving investors greater certainty. We encourage the government to introduce a framework to capture future ‘price shock’ scenarios without a need for emergency legislation.”

Other measures in Finance Act 2025

Additional personal tax and duty measures in the Bill include: 

• Extending the inheritance tax threshold freeze for a further two years, until 2030; 
• Making it easier to operate PAYE on UK earnings of someone who works both in UK and overseas; 
• Measures to prevent tax free transfers to overseas pensions from UK relieved pensions; 
• Changes to taxation of alternative (sharia-compliant) finance to produce the same tax outcomes as conventional financing; 
• Confirming Statutory Neonatal Care Pay is taxable as social security income; 
• Extending the scope of agricultural property relief from inheritance tax to land managed under an environmental agreement; 
• Cut to alcohol duty draft relief to take a penny of duty off an average-strength pint; 
• Above inflation increases to air passenger duty, in particular the higher rate on larger private jets; 
• Paving legislation to enable the UK to adopt the OECD Crypto-Asset Reporting Framework; 
• Paving legislation for a new excise duty on vaping products.

Additional business tax measures in the Bill include: 

• Introduction of the 'undertaxed profits rule' into UK legislation – this is the third and final ‘Pillar 2’ rule collectively giving effect to a global minimum corporate tax rate of 15%; 
• Extending the 100% first-year allowance on zero-emission cars and on electric vehicle charging points by a year to April 2026; 
• Enabling film and high end TV companies to claim a higher audio-visual expenditure credit on UK visual effects costs; 
• Changes to the taxation of Employee Ownership Trusts and Employee Benefit Trusts, principally tightening up eligibility for tax reliefs; 
• Above inflation increase to the Soft Drinks Industry Levy; 
• Anti-avoidance measures in relation to liquidation of limited liability partnerships (LLPs) and loans made to shareholders; 
• Enabling HMRC to prepare for the introduction of a UK carbon border adjustment mechanism.

The Act does not include increases to employer national insurance, which are being legislated for separately, or changes to inheritance tax agricultural and business property reliefs, which are expected in a future Finance Bill.