Finance minister George Osborne’s Treasury department says it hoped to simplify the current tax rules for non-domiciles and to ensure they make a fair tax contribution, while also encouraging them to invest in the UK.

The move has been welcomed by the wealth management industry as it ends existing uncertainty about their status among non-domiciled individuals.

For tax purposes, non-domiciled individuals are defined as those who are liable to UK tax on all their income and capital gains which arise in the UK, but only liable to UK tax on non-UK income and capital gains if they are remitted to the UK.

The consultation provides details of the package of reforms announced in Osborne’s 2011 budget. The government said it did not intend to change the broad principles behind the existing tax system for non-domiciles.

However, according to the Treasury, the current rules discouraged non-domiciles from bringing income or capital gains to the UK, creating barriers to investment. The government said it wished to remove these barriers to encourage non-domiciles to invest in UK business.

The Treasury says the tax charge for non-domiciles who claim the remittance basis in a tax year and who have been UK residents for 12 or more of the 14 years prior to the year of claim will increase from £30,000 to £50,000.

In addition, non-domiciles will be allowed to bring overseas income and capital gains to the UK tax-free for the purpose of commercial investment in UK businesses; a change the Treasury hoped will encourage non-doms to invest more in the country. Some of the other existing rules will also be simplified.

“It is important that skilled individuals and investors are encouraged to come to the UK from abroad and we recognise the fact that non-domiciles can make a valuable contribution to the UK economy,” said David Gauke, Exchequer Secretary to the Treasury, according to a statement. “That is why we want to make it easier for them to invest in UK business.”

In conjunction with its consultation on tax reform for non-doms, the government also published a consultation on its plans for a statutory residence test.

There is currently no full legal definition of tax residence in the UK, so the rules are unclear, complicated and can be seen as subjective, creating uncertainty for individuals about their residence status and acting as a deterrent to businesses and individuals considering investing in the country. The government has proposed a framework for the statutory residence test and is seeking views on its design and implementation.

The moves were welcomed by the Society of Trust & Estate Practitioners, which said that residency and non-domicile “are widely considered too complex, leaving existing clients unsure of how the UK tax regime will operate”.

“A statutory residence test is capable of being a simple and objective test and is widely used by other countries. For non-doms we expect proposals to simplify the way they are taxed on commercial investment into the UK. These changes will give clients much needed certainty and improve our international competitiveness,” said Wendy Walton, chairman of STEP’s technical committee.

"The consultations show that the Government has listened to many of the concerns raised by the industry for years.  If the proposals are implemented in anything like their current form, life will get much easier for anyone who needs to work out their UK residence or domicile position," Andrew Robins, tax director, RBC Wealth Management, said in a statement. 

"Many non-doms hold funds offshore in currencies other than sterling, and this has traditionally caused major headaches for UK tax purposes.  The problem is that many of these accounts are subject to capital gains tax on exchange gains, which means that in theory a tax charge can arise every time money leaves the account," he said.

"Calculating the gains or losses on movements in these accounts can be extremely time consuming and expensive, and many taxpayers are not even aware that they are required to do so at all.  The government has proposed to do away with all of these problems by taking personal foreign currency bank accounts outside the scope of tax altogether.  This measure will need to be implemented carefully to avoid abuse, but is extremely welcome, and shows the sensible approach that characterises most of the proposals in the consultation," added Robins.

Both consultations are open to views from interested parties until 9 September 2011, and a summary of responses will be published in the autumn. Draft legislation will then be published for comment with a view to including final legislation in the Finance Bill 2012.