Political funding from British citizens living abroad should be capped at between £100,000 and £300,000 a year and donations in cryptocurrency temporarily banned, a government review has recommended.

The findings by Philip Rycroft, a former permanent secretary at the Home Office, will be a blow to Reform UK, which has received about £12m in the last year from the Thai-based investor Christopher Harborne and other donations from a number of donors based in Monaco.

Rycroft said the measures were needed to prevent the risk of foreign interference in British politics, saying donations from abroad are more difficult to trace and regulate. He also said there was a question of fairness when overseas donors were not subject to the same tax requirements as UK residents, recommending an annual cap at about £100,000 to £300,000.

He cited the threat of influence from hostile foreign states such as Russia, China and Iran, saying divisive internet commentary about Scottish independence had dropped by about a quarter when Iran’s internet blackout took place.

He also highlighted the risk of influence by actors from allies such as the US, where the billionaire Elon Musk has floated the idea of trying to put money into British politics.