Tax exiles cash in on Brown's loophole

Wealthy foreigners can look forward to several more years of using the UK as a tax haven, while Treasury officials consider how to implement a promise by Gordon Brown to close the loophole.

The promise will be repeated when the Chancellor makes his pre-Budget statement in the Commons early next month, but Mr Brown will not be able to tell MPs when he might bring in the measure, which is expected to be worth an extra £1bn to the Treasury.

The Government has been heavily lobbied by Greek shipping owners living in Britain, and by City advisers who have warned that closing the tax loophole would provoke an exodus of wealthy foreign businessmen. The Inland Revenue is drawing up a report on how to close the tax loophole, but has not yet resolved the problem of how to distinguish someone who is visiting Britain for only a few years from a long-term resident using British laws to avoid tax.

A series of meetings with City accountants and foreign chambers of commerce will begin after November's pre-Budget statement, a Treasury source indicated. But he warned that there is no prospect of the consultation being finished in time for next March's Budget, ruling out any prospect of the loophole being closed in 2003.

The law allows about 60,000 foreign residents in Britain to avoid paying UK income tax on money earned overseas by claiming that their true domicile is the country of their family's origin. The law is unique to the UK. In opposition, Labour accused the Tories of perpetuating it because several Greek shipping owners had secretly made huge donations to their party.

However, one of the well-known beneficiaries from the rule is Lakshmi Mittal, a donor to the Labour Party who was given Tony Blair's personal backing in his bid to take over the Romanian steel industry.

The loophole has also helped to attract Saudi princes and wealthy Americans to this country. Mohamed al-Fayed, the controversial owner of Harrods, has used it.

In April, it emerged that the richest man in Britain, Hans Rausing, who made more than £4,000m from his family's Tetra Pak packaging company, was receiving more from the Treasury in VAT refunds and grants than he was paying in tax. Mr Rausing, who has lived in Sussex for 18 years, has been allowed to claim that he is domiciled in Sweden, where he was born.