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There is no denying that foreign buyers have been among the main drivers of the meteoric price rises seen at the top end of the London property market in recent years. According to figures from the estate agency Knight Frank, the price of homes sold for £6m and above – almost three-quarters of which are bought by people from overseas – has risen by 79.4% in the past two years.

Could all that be about to change? Plans by the government to clamp down in April on the preferential tax treatment enjoyed by “nondoms” (people, mostly foreigners, who are resident but not domiciled in Britain) are causing alarm among the estate agents of Knightsbridge, Chelsea and Belgravia – despite a watering-down of the proposals announced last week. All this comes amid signs that the market in prime central London is slowing sharply, with prices up by just 1.1% last month – less than half of the 3% registered in January 2007.

“If the nondom market disappeared, central London prices would fall significantly,” says Liam Bailey, head of research at Knight Frank. Nor would the effect of a pull-out be confined purely to central London, he adds. A study by the agency found that money invested in property by nondoms has trickled down through the market – accounting for an estimated 5% of the 17% price rise in the southeast, and 6% of the 22% rise in Greater London in the past two years, as buyers priced out of Belgravia and Chelsea moved southwest to more affordable areas such as Wandsworth or Fulham.

A nondom pull-out would also have an impact on the rental market, says Charles Oliver, head of private buying at Chesterton, a London-based estate agency. “It’s a rolling effect,” he explains. “If they go, it will affect the top end of the market and the top-end rentals.”

The crucial question, one nobody can answer for sure, is: how many nondoms will actually move away? And, of those, how many will give up their foothold in the London property market? Under the proposals, anyone claiming nondom status must pay a £30,000 levy after they have lived in Britain for more than seven years. Last week’s changes mean they will, after all, not be required to make any “additional disclosures” about incomes and gains falling outside the UK tax net.

Nevertheless, anecdotal evidence from estate agents and property finders suggests that some of those who will be affected are already voting with their feet.

Howard Elston, a negotiator in Aylesford’s Chelsea office, has four nondom clients selling property. Simon Barnes, a top-end search agent, has had several inquiries from clients looking to move, and has been asked to find a discreet buyer for the £10m London property of a French banker who plans to relocate to Geneva.

Rupert Des Forges, a partner in Knight Frank’s Sloane Avenue office, has dealt with five Europeans who have already left London. “They’re transient,” he says. “They’ve got no loyalty and they will all pack up and go as quickly as they came.” Paddy Dring, head of international residential sales at Knight Frank, says he has noted a marked increase in inquiries from nondoms heading for the exit. “People are considering their options,” he says. “They’re looking at a number of different locations, and a lot of people are saying they’re definitely off.”

Dan Andersen, 65, is among them. He moved to London from his native Sweden 16 years ago to work for an international bank based in London. He now works for himself, running a couple of companies in Britain, investing in small start-ups, running several family trusts based abroad and managing money for various high-profile clients. He and his wife, Marianne, 62, have benefited from the tax breaks enjoyed by nondoms for assets held offshore, but are selling their four-bedroom flat in Chelsea for £2.5m (through John D Wood; 020 7352 1484, www.johndwood.co.uk) and returning to Sweden – a country not normally considered a tax haven.

“The income tax is fairly high there, but there’s no inheritance tax, no gift tax and no property tax,” says Andersen. “I can arrange it so I have just the income I need to live on in Sweden, so it will work out better financially for me because of the offshore-assets aspect.” Tom Finch, 45, a property developer, is also making plans to leave. “I don’t think people object to paying tax,” says Finch, whose Barbadian wife is nondomiciled. “It’s the requirement to release details to the Revenue of all worldwide assets.” The Finches plan to keep their family house in Surrey, but are buying a chalet in Switzerland, and may move either there or further afield, to Mauritius or the Seychelles.

Switzerland, which allows foreign residents to negotiate a lump-sum annual tax payment, typically about £46,000 a year, is one of the most popular destinations for those planning to leave, according to a recent report by the Society of Trust and Estate Practitioners. So, too, are Monaco, parts of the Caribbean and the Isle of Man – although the climate there is something of a turn-off.

Despite the gloom – fuelled by trust lawyers, accountants and others who earn hefty fees from nondom clients – many agents think the gloom is exaggerated. “Everyone’s talking about leaving, but I don’t think they actually are,” says Jonathan Hewlett, head of London sales at Savills. “One client told me, ‘I don’t earn all this money to go and live somewhere I don’t want to live – I'm happy in this country.’ There’s just a lot of talk.”

Bailey also warns against exaggerating the likely impact on the property market. “It’s dozens rather than thousands,” he says. “Most of these wealthy hedge-fund people don’t really have foreign income to remit anyway.”

What £1m buys in

Belgravia: A 333 sq ft studio Monaco:A 357 sq ft studio
Manhattan: A 588 sq ft one-bedroom flat
Geneva: A 1,538 sq ft three-bedroom flat
Jersey: A 2,000 sq ft four-bedroom family house
Grand Cayman: A 2,580 sq ft four-bedroom villa
Dubai: A 4,000 sq ft five-bedroom villa

Source: Knight Frank Residential Research

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