HOPES of a cash windfall could turn into a tax trap for unwary investors seeking repayments of withheld dividends on British shares, experts warn. Many local investors who were expecting big repayments have been shocked to receive demands for additional tax instead. Tax advisers say some investors have received demands for more than HK$1 million. Patricia Reid, tax principal for certified public accountants Ernst & Young, warned investors that making the repayment claim could, in addition to the tax demand, leave them open to further investigation by British tax authorities. Ms Reid said that because of limited resources, Britain's Inland Revenue generally did not chase overseas investors, even though there might be a technical liability. She said: 'Had these individuals not contacted the Inland Revenue [for a refund], it would not even know that a higher-tax-rate liability existed and would not usually seek to collect the additional taxes technically due.' By making the claim, however, the unsuspecting share owner does the Inland Revenue's work for it. Investors are making rebate claims in respect to dozens of popular local shares, such as Cable & Wireless and HSBC Holdings, where the issuing company is incorporated in Britain and from which British tax authorities automatically withhold one-fifth of the dividend. In many cases, however, the claims have been large enough to use up the individual's personal allowance and push him into the top marginal tax rate of 40 per cent. This means that many individuals are being taxed at twice the rate they thought they would be reclaiming. Take, for example, an unmarried investor who has received dividend income of GBP100,000 during 1995-96 on which he has been taxed by British authorities GBP20,000 at source. Rather than receiving a tax credit for the amount claimed, the individual would receive a tax bill for GBP13,730. In addition, he would have to pay for the reclaim service. Investors are being sent letters from Britain-based tax companies saying taxpayers can claim a tax refund of more than HK$48,000 per person and more than HK$11,000 for each future year they continue to hold the share. Such letters make no mention of the possibility the claims could spark a potential tax liability. A Hong Kong company making the claims, P & Company, said it checked out each claimant's potential tax liability before filing a claim. A spokesman said: 'It varies according to the circumstances. We look at the individual's circumstances before making a recommendation.' Ms Reid urged those considering making a claim to consider their potential liability, not just their potential gain, or to seek expert and independent advice. She said some angry claimants who had received tax claims rather than refunds were considering legal action against their advisers. The maximum tax credit an individual will be able to claim within their personal allowance for the 1995-96 tax year is GBP705. This is before charges. The Inland Revenue Department has amended its rules and will not impose higher rates on investment income from the 1996-97 tax year. But claims for previous years will not be exempted. The concession does not apply to other forms of Britain-sourced income, such as rental income.