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Last year, when the International Monetary Fund published a paper on offshore tax havens, it included Switzerland, the Cayman Islands, Jersey, the Bahamas and several other countries where the rich stash their money beyond the reach of grabby governments back home. But there was one surprising new entry on the list: the United Kingdom. The IMF was merely recognizing what wealthy foreigners in Britain have known for years. While British citizens shoulder taxes of up to 40%, residents who weren't born there can take advantage of the nondomicile — or nondom — rule, which means they're only taxed on income made in or brought into the country. With most of their cash safely tucked away in offshore trusts, foreigners can live in Britain virtually tax free.

"To be honest, I think this system is a little bit crazy," says one French private-equity investor who has lived in London for over 15 years. "It's been a bonanza time for nondoms — like Christmas every day." But here comes the Grinch. Spurred on by mounting criticism over what many see as unfair special treatment for rich foreigners, the British Treasury has announced that the fun is over. Along with a new 18% flat rate for capital-gains tax, the government is proposing an annual fee of around $60,000 for any foreigner who lives in the country for more than seven years, and wants the tax man to keep his hands off their non-British assets. Anyone unwilling to stump up that fee will have to pay taxes like everyone else. While the superrich may grit their teeth and accept the $60,000 bill as a minor irritation, it's expected that a significant number of Britain's nondoms won't pay it, and will thus be forced to join the general tax pool. Or they'll leave.

When he announced the changes back in October, Chancellor of the Exchequer Alistair Darling admitted that they might only bring in an additional $1.28 billion a year. But the real issue isn't the money, he said — it's that "Everyone who lives and works here should pay their fair share." Raising taxes for those who can't vote might be a canny political move, but economically it may backfire. The Treasury reckons some 3,000 registered nondoms — out of a total of 115,000 — will pull up stakes when the new rule kicks in on April 6. Britain's wealth managers are more pessimistic, predicting that nondoms will leave in droves, taking billions out of the economy and affecting everything from property prices to spending on luxury goods. The annual fee isn't official yet, and won't be until after Feb. 28 — the final day of the "consultation" period in which the Treasury will listen to arguments for and against it. But the consensus is that the law will pass. Already, says Paul Knox, a wealth adviser at JPMorgan Private Bank, "there is a trickle of people who have decided they have to leave. The problem is that a trickle can become a flow. The smart people are always ahead of the curve, and there are some pretty smart people making the decision to move."

Where will they — and their cash — go? They have plenty of options. Guernsey, Ireland, the Isle of Man, Jersey, Luxembourg, Monaco and Switzerland all boast no or low taxes for expats, and are all less than a three-hour flight from London. Cast the net wider and there are dozens of countries offering perfectly legal perks and breaks to attract tax exiles. There are more than 45 recognized tax havens, holding up to $7 trillion in assets, and these numbers are growing. According to the Boston Consulting Group, the number of households with assets of $1 million or more swelled by 14% in 2006 to 9.6 million, while last year's Forbes Rich List included a record 946 billionaires. Figuring out ways to help the rich stay that way is a lucrative business. Based on GDP per capita, 11 of the world's 20 richest countries are tax havens, with Luxembourg holding the top spot.

On the European Continent, countries with some of the highest tax rates — like Denmark, Germany and Sweden — sit side by side with those collecting some of the lowest, like Luxembourg and Liechtenstein. That's handy for Europeans who want to work in one country while they live, and save, in another. So execs and entrepreneurs can do business in London while settling in Monaco, the city-state famous for sunshine, glamour and zero tax on income or investment gains. Belgium, where some assets are exempt from capital-gains tax, is peppered with wealthy French escaping a tax rate that can top 40%. And Luxembourg, the euro zone's biggest private-banking center, attracts wealthy foreigners by exempting their investments from tax.

But it's Switzerland, the most famous tax haven of all, that remains the global leader in attracting cash from overseas. The number of tax exiles living there shot up from 2,394 in 2003 to 4,175 in 2006, according to consulting firm KPMG, and they poured around $917 million into its tax system in 2006 alone. The central government lets foreigners negotiate how much tax they pay directly with whichever of the country's 26 cantons they move to; an annual lump sum is calculated, based on five times the rental value of the expat's Swiss home. Rates average around 30%, but vary among cantons — in Geneva, taxes are on the higher side, while in less crowded cantons like Zug (an increasingly popular spot for foreign hedge-fund managers) they can be less than 15%. For good measure, there's the added thrill of being able to call singer Shania Twain, tennis champion Boris Becker and Formula One stars Michael Schumacher and Lewis Hamilton your neighbors.

Another big draw is Switzerland's tradition of discretion. Its strict banking privacy laws are a bonus for foreigners who don't want anyone peeking at their accounts. But the European Union, worried about what it sees as rampant tax evasion, is pushing for more transparency in Europe's banking systems. The E.U. Savings Taxation Directive, which came into effect in 2005, demands that member states and their dependencies either automatically exchange information on the accounts kept in their banks by E.U. residents or start imposing a 15% withholding tax on any foreign-sourced interest paid into those accounts. Most member states agreed to share information, but a few hold-outs chose the levy instead. Switzerland, which isn't in the E.U. but is covered by the directive, was one of them. Now, Swiss secrecy comes at a price.

In 2006, Switzerland collected an extra $492 million in withholding tax from the bank accounts of E.U. residents. And as the rate goes up to 35% by 2011 in compliance with the E.U. directive, foreigners will find the Swiss tax man reaching deeper into their pockets. But for every tax haven that loses its seductive charms, there's another working hard to woo the rich. Dubai, which has been dubbed the Switzerland of the gulf, has spent billions creating zones where foreigners can set up and invest in companies free from corporate tax. And other gulf states like Qatar and Oman are following Dubai's lead by making their own tax regimes more foreigner-friendly, too.

Further east, Singapore has likewise turned itself into a major offshore haven by not taxing capital gains or income derived from outside the city-state. It's also easier now for foreigners to gain permanent residency, as long as they have at least $1.1 million to invest in a Singapore-based start-up or venture-capital fund, or $3.5 million to stick in a local financial institution. And while the E.U. is forcing European banks to open up to the authorities, Singapore has strengthened its customer confidentiality laws: anyone who reveals private financial information faces a fine of up to $88,000 and three years in prison.

Then there are Singapore's new trust laws, which help the rich keep their fortunes in the family by letting them pass assets on to beneficiaries tax-free. And the perks strongly favor foreigners. "To get all the benefits one must not be Singaporean, nor should one's beneficiaries be Singaporean," says Michael Troth, Asia-Pacific head of global wealth-structuring for Citigroup. As a result, says Troth: "Singapore is becoming the predominant provider of trust services to our Asian clients."

With so many countries doing all they can to lure the rich, Britain's decision to get tough on tax breaks seems either brave or crazy. The government's gamble is that London, in particular, has so much else to offer its nondoms — a leading position in financial services, world-class culture, easy access to Europe, the U.S. and the Middle East — that most will stay and pay. But at a time when the economy is already showing signs of wear and tear, there's clearly a danger that the foreign rich will pack up and take their fat wallets with them. "We find these changes quite bizarre," says Andrew Tailby-Faulkes, a tax partner at Ernst & Young in London. "If we do have an exodus of wealthy people, that's got to be bad news for Britain." But for the tax havens that manage to coax them to their shores, the news couldn't be better.

• JUMANA FAROUKY/LONDON
• Spooked by a proposed tax change, Britain's foreign rich consider leaving for other offshore havens