The changes, added on to recent proposed legislation primarily designed to give tax breaks to US military personnel returning from duty in the Middle East, will force any person wishing to become an expatriate to pay a one-off tax charge, based on the amount of gain they would be deemed by US tax authorities to have earned on the sale of their worldwide assets.

The scale of the changes in terms of their financial impact could be large although there is no exact figure on the number of people who quit their US citizenship every year, Jay Krause, partner at Withers, told WealthBriefing.

“Many people have significant difficulties in aligning their US tax affairs with tax affairs where they live. If the people finding this difficult want to give up their US citizenship, this ” he said.

Anyone born in the US, even if they spent nearly all their lives abroad, qualifies for US citizenship. Meanwhile, a lot of people who retire abroad will find the one-off tax charge and other measures a heavy burden, he said.

The tax charges will fall on anyone who gives up US citizenship or who surrenders a long-term residency permit that they have held for at least eight taxable years. The tax will apply to citizens with at least $2 million of assets and apply on taxable liabilities over $600,000. According to official US estimates, the tax is expected to raise $10 million in 2008, $56 million in 2009 and $52 million in 2010. 

In some cases, taxes will be levied on capital gains – the current US capital gains tax rate on assets held for at least 12 months is 15 per cent. On other assets, the tax that a person pays could be even higher, Mr Krause said.

The changes will also force expats making gifts to US citizens to pay an estate tax, or inheritance tax, on the bequest, at the highest possible rate under US law, of 45 per cent. In another move, if a trust was set up for a US citizen who subsequently gives up US citizenship, the trustee must withhold up to 30 per cent of any money paid out. Mr Krause said the move to making trustees withhold money rather than tax beneficiaries was “a massive change” but would be tough to enforce.

The draft legislation, which was supported by both houses of US Congress – with the latest vote on 20 May - has been sent to President George W. Bush for approval. If Mr Bush does not sign the bill within 10 days it will automatically become law. As the measure is contained within a bill designed to help US service personnel, it is extremely unlikely that Mr Bush will veto it, Mr Krause said.

The change could create a dilemma for US citizens living as non-domiciled residents in the UK. At present, non-doms who want to avoid paying tax to the UK government on their worldwide income must pay a £30,000 annual levy to the UK taxman. But if such a person wanted to become a fully domiciled UK citizen, they must pay a potentially large bill to the US government instead, added Mr Krause.