An international elite is pricing British citizens out of the housing market with the help of government tax breaks for foreigners living in the country, figures reveal.

More than half of London’s multimillion-pound houses are now bought by “nondoms” (nondomiciles) who, unlike most British citizens, are able to use offshore trusts to pay far less stamp duty.

Economists say that the new boom in house prices in the capital fuelled by foreign money is rippling down the market, making it harder for first-time buyers to get on the property ladder.

Gordon Brown will come under pressure today to justify the rules, which critics claim create a double standard. The Government exempts nondoms from tax on their international earnings, even though in most cases their home countries do not tax them either.

While it tends to be wealthy foreign citizens who take advantage of the rules, many British-born people can also declare themselves nondom, on the ground that their family origins and “cultural ties” lie overseas.

A study published by the International Monetary Fund in April ranked Britain alongside Switzerland, Bermuda and the Cayman Islands as an “offshore financial centre”, provoking accusations that the City of London has effectively become a major tax haven.

Liam Bailey, head of residential research at Knight Frank, the estate agent, said that 50 to 60 per cent of properties that sold for £3 million or more now went to foreign residents. He said: “The more expensive you go, the bigger the share of foreign buyers.”

Figures from Savills, the estate agent which specialises in properties at the top end of the market, show that some 68 per cent of properties selling for more than £5 million last year went to foreign buyers.

The Liberal Democrats have described the situation as grossly unfair, saying that the Chancellor has avoided the issue out of fear that tackling it would spark an exodus of wealthy foreigners from the City, undermining the booming financial services sector.

Vince Cable, the Liberal Democrat Treasury spokesman, promised to close the loophole that exempted nondomiciles from tax on their British homes. Under his proposals, which will be expanded upon in a report by the Lib Dem tax commission today, nondoms would also lose their status if they stayed in Britain for more than 17 years.

Government figures show that there were 112,000 nondoms in 2005, an increase of 74 per cent from three years before, and accountants believe that the figures are continuing to rise rapidly. The Treasury says that it does not know how much tax they are able to save on their overseas earnings each year.

Fionnuala Earley, chief economist at Nationwide, said: “Neighbouring regions’ property prices have been picking up alongside London, which suggests that the ripple effect is alive and well.”

As a case study, The Times examined the Land Registry records for properties on the west side of Cadogan Square. Flats on this street regularly sell for more than £1 million.

Of the 13 properties looked at, five were held by offshore companies, ranging from firms based in the British Virgin Islands to Jersey, suggesting that their owners could be taking advantage of the tax breaks for nondomiciles. A further three were registered to companies not listed at Companies House.

Supporters of the rules say that they have encouraged talented people to move to London. Patrick Stevens, tax partner at Ernst & Young, the accountants, said: “If you are trying to boost the City then changing the nondom rules would be insane.”

The Treasury said that the policy towards nondomiciles had been under review since 2002, but senior accountants believe that the issue has been kicked into the long grass. One said: “A minister told me that the review was likely to continue for several years yet. He smiled broadly as he said it.”

Nondom rules

— In most countries, citizens living abroad are not taxed; noncitizens are taxed on their worldwide earnings for as long as they are resident

— In Britain, noncitizens who claim nondomiciliary status are taxed only on the money they earn or bring into the UK. Property taxes can often then be avoided using offshore trusts

— The main exception is the United States, which continues to tax its citizens when they live abroad on their worldwide earnings. US citizens claiming nondom status in London do not enjoy an equivalent tax break to those from other countries

— British citizens living abroad generally pay tax on their worldwide earnings to the country in which they are resident

From The Times Online