UK Fiscal Challenges and Market Implications: Tax Policy Uncertainty and Asset Valuations

The UK's 2024–2025 tax reforms have introduced a seismic shift in fiscal policy, creating significant uncertainty for investors and reshaping asset valuations across real estate, private equity, and equity markets. These changes—ranging from increased capital gains tax (CGT) rates to the reclassification of carried interest and the abolition of the non-domicile regime—reflect a government prioritizing short-term revenue generation over long-term economic stability. While the stated goal is to address fiscal deficits and promote fairness, the unintended consequences for market confidence and investment behavior are becoming increasingly evident.

Capital Gains Tax Hikes and Real Estate Valuations

The most immediate and visible impact of the 2024 Autumn Budget was the sharp increase in CGT rates. For the 2025/26 tax year, the basic rate rose from 10% to 18%, while the higher rate climbed from 20% to 24% Autumn Budget 2024 — Overview of tax legislation and rates^[1]. These changes apply to residential property and carried interest, directly affecting high-net-worth individuals and institutional investors. According to Zoopla's July 2025 data, the average UK house price stood at £270,000, a 1.3% annual increase House Price Index: August 2025^[2]. However, this modest growth masks underlying fragility: higher CGT rates have discouraged sellers from realizing gains, leading to a surge in pre-reform transactions in late 2024 and a subsequent slowdown in 2025.

The Office for Budget Responsibility (OBR) warns that while these reforms may temporarily boost GDP growth (forecast at 1.1% in 2024 and 2% in 2025), they risk crowding out private investment in the medium term UK Budget: Labour's Rachel Reeves unveils plan with tax ...^[3]. For real estate, this means prolonged stagnation in transaction volumes and a shift toward corporate ownership structures, as individuals seek to mitigate tax burdens by holding assets through companies Understanding Capital Gains Tax in 2025 - MHA^[4].

Carried Interest Reforms and Private Equity Performance

The reclassification of carried interest from capital gains to income tax has further complicated the investment landscape. From April 2026, carried interest will be taxed at up to 47% for additional rate taxpayers, compared to the previous 28% CGT rate Carried Interest: Rates of Capital Gains Tax^[5]. This shift, coupled with the 2025 interim increase to 32%, has already dampened private equity fund performance. A Grant Thornton survey reveals that only 50% of UK-based private equity firms plan to increase investments in 2025, lagging behind the 67% global average Global optimism, UK caution: Private equity outlook 2025^[6].

The effective tax rate on carried interest—34.075% for qualifying cases—reduces net returns for fund managers, potentially eroding internal rates of return (IRR) and cash-on-cash returns for limited partners Carried Interest and UK Tax – Changes Are Coming^[7]. This has prompted a reevaluation of fund structures and a migration of capital toward alternative investments with more favorable tax treatments, such as venture capital or infrastructure funds.

Non-Dom Reforms and Cross-Border Investment

The abolition of the non-domicile regime, effective April 2025, has introduced another layer of complexity. Non-UK domiciled individuals now face a four-year exemption period before being taxed on worldwide income and gains Non-dom reforms: the four-year itch^[8]. While this simplifies compliance for some, it also deters long-term investment in UK assets. Peter Ferrigno of Henley & Partners notes that the four-year window is insufficient for families to establish roots, creating a “misleading” incentive structure UK's New Non-Dom Tax Reforms 2025: Why the Changes May Backfire for Global Investors and Expats^[9].

The exodus of high-net-worth individuals (HNWIs) has already begun, with lost tax revenue and reduced economic activity compounding the fiscal challenges. The Institute of Chartered Accountants in England and Wales (ICAEW) highlights that tax uncertainty has driven business confidence to its lowest level since late 2022, with confidence indices at -4.2 Growth impossible without tackling red tape, costs and ...^[10].

Equity Market Divergence: FTSE 100 vs. FTSE 250

The FTSE 100 and FTSE 250 have diverged in response to these reforms. As of September 2025, the FTSE 100 traded at 9,221 points, up 11.49% year-to-date, while the FTSE 250 showed relative resilience amid global uncertainties United Kingdom Stock Market Index (GB100) - Quote - Chart^[11]. This divergence reflects the indices' composition: the FTSE 100, dominated by multinational firms, faces headwinds from global trade tensions, whereas the FTSE 250's focus on domestic companies benefits from the temporary fiscal stimulus. However, the OBR cautions that prolonged tax uncertainty could erode this resilience, particularly if private investment continues to wane Economic and fiscal outlook – October 2024^[12].

Conclusion: A Call for Fiscal Clarity

The UK's 2024–2025 tax reforms underscore a critical tension between short-term fiscal consolidation and long-term economic growth. While the government aims to close tax gaps and promote fairness, the resulting uncertainty has stifled investor confidence and distorted asset valuations. For markets to stabilize, policymakers must provide a clear, long-term tax roadmap that balances revenue needs with incentives for investment. Until then, investors will remain cautious, prioritizing liquidity and diversification over high-risk, high-reward opportunities in the UK.