British investors are facing a $7bn (£5bn) tax blow from Donald Trump’s “big, beautiful bill”, analysts have warned.

The UK Government alone could have to pay $400m a year as part of the “revenge” tax outlined in the Republican tax and spending bill that has recently been passed by the House of Representatives.

Mr Trump’s bill is set to charge a retaliatory tax on some foreign investments made by entities from countries that the US deems to have “unfair” tax systems – which includes the UK.

The tax, known as Section 899, would levy a 5pc rate on gains made by UK investors – a rate that will increase by five percentage points each year up to a maximum rate of 20pc.

Crucially, analysts have warned the wording of the policy documents open the door to taxing interest earned on holdings of US Treasuries, which are usually tax-exempt.

The UK will be hit particularly hard if America starts charging a new tax on yields from US Treasuries because of its vast ownership of this debt.

Britain recently overtook China as the world’s second largest holder of US Treasuries, behind only Japan. UK entities, such as pension funds and private investors, hold a total of $779bn in US government bonds.

The UK receives about $35bn a year in earnings, assuming an average interest rate of 4.5pc, according to analysis by the National Institute of Economic and Social Research (Niesr).

If these yields are taxed at 5pc, this will cost $1.8bn – rising to $7.2bn as the tax rate increases to 20pc in the fourth year.

Duncan Hardell, international tax specialist at NYU’s Tax Law Centre, said that although it was unclear whether exemptions on Treasuries would still apply, there is a risk the tax rate will go up.

“The statute itself is not clear on this point,” he said.

Section 899 has triggered widespread fear across Wall Street and prompted a huge lobbying drive, with dozens of international executives travelling to Washington DC to meet with members of Congress earlier this month to discuss the measure.

The UK Government alone holds $55bn in US Treasuries. Niesr estimates yields on these holdings would be liable for a $100m tax charge in the first year, rising to $400m in the fourth year.

Stephen Millard, Niesr’s deputy director, warned that if this measure was imposed it would likely trigger a fire sale.

He said: “The big thing, of course, is how people would respond if it becomes clear that this income was taxable. You might expect to see holders of US Treasuries try to get out of them as much as they possibly can.”

This would mean market turmoil, as a sell-off would drive down the value of the bonds dramatically. In turn, this would trigger a surge in US government borrowing costs as investors demanded higher returns to cover their costs.