Wealthy foreign residents face a fresh crackdown after the Government announced plans yesterday to block so-called nondomiciled residents from using overseas trusts to hide earnings from the taxman.

In a surprise announcement by the Treasury, a raft of new measures designed to penalise non-doms are set to be introduced alongside the £30,000 fee controversially announced by Alistair Darling, the Chancellor, in October. Critics of the measures, laid out in a consultation paper, assert that the proposals will force businesses run by nondoms to move overseas and discourage leading international businessmen from working in Britain.

Accountants said that most of the country’s estimated 111,000 non-doms would be hit by new rules that ban the use of offshore mortgages and trusts to pass off UK earnings as tax-free income generated overseas. A range of other, smaller technical changes introduced in the consultation paper will make life in the UK unattractive to nondoms, accountants claim. These include the closure of a loophole that allows non-doms to shift money between bank accounts before the end of each financial year to avoid paying tax on earned interest. This popular scheme is likely to be scrapped.

Leonie Kerswill, a tax partner at PricewaterhouseCoopers, the accountancy firm, said: “It is clear that the changes proposed in the consultation document on the tax treatment of residence and domicile go further than the much-publicised £30,000 levy. “

The proposals include a significant tightening of the entire non-domicile tax regime which will affect most such people and significantly increase the amount of UK tax they have to pay - and may cause some to question whether it is worth staying here and investing in the UK.”

Richard Murphy, of the Tax Justice Network, said: “They’re making the whole arrangement extraordinarily unattractive. Why create more opportunities for massive amounts of legislation, dispute and consultation when we could simply solve this by saying: ‘Let’s get rid of the non-dom status’?”

The offshore mortgages, trusts and bank accounts popular with nondoms as a means of cutting their tax bills will be banned by the proposals. At present, the use of these tax-saving plans is accepted practice.

Tax experts complained last night that the consultation period did not give accountants and non-doms enough time to review their affairs. Ms Kerswill said: “There’s a lot of talk about fairness in this consultation document but a lot of the fairness is knowing what the rules are. It is exactly the same position for proposed capital gains tax changes.”

Non-doms have been considering their options since the Chancellor used his PreBudget Report to announce that they would face a £30,000 annual charge for claiming the status. The Treasury said yesterday that about 20,000 residents would be liable to pay the flat charge from next April. The tax would generate £550 million by 2011.

Stuart Skeffington, a partner at Withers, the law firm, said: “This consultation paper confirms fears that the Treasury is set to target the use of offshore trusts by non-domiciled residents in the UK. Non-doms have until April 2008 to assess their use of offshore trusts before legislation is introduced in the spring. These measures may well act as a further disincentive to non-doms looking to have their primary residence in the UK.”

The clampdown on non-domiciled status has sparked a furious debate. Richard Lambert, the Director-General of the CBI, said that it was “legitimate” to question the tax arrangements of so-called nondomiciled company executives, after TUC research indicated that they were avoiding paying huge sums of tax.

Many of Labour’s big donors are businessmen based in Britain but born overseas, making them eligible for non-domicile tax status. They may not all claim the tax break but they have not clarified their position.

Lakshmi Mittal, who contributed £4.125 million to Labour, is non-domiciled. Other potential non-dom donors include Robert Tchenguiz, the Iranian-born financier, who has donated more than £60,000 to Labour.

End of the road for nondoms?

The figures

- 111,000 non-domiciled residents in 2005-06
- £3.9 bn per year UK tax liability
- 68% stay three years or less

The crackdown

Under the Treasury’s plans:

- Will face £30,000 annual charge from April 2008
- Can no longer shuffle income between bank accounts to avoid tax
- Can no longer escape tax by bringing in foreign income as non-cash assets
- Can no longer bring in untaxable foreign income via relatives or offshore trusts
- Can no longer avoid tax by putting UK earnings in foreign companies

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