Alistair Darling executed a partial retreat over his tax clampdown on foreigners domiciled in Britain last night.

In his second U-turn in recent weeks, after a £200 million climbdown on inheritance tax, Mr Darling made clear there was no intention to tax so-called “non-doms” on foreign income or gains not sent to the UK.

In addition, it was explained that the tax treatment of offshore trusts would not apply retrospectively to gains accrued or realised before the changes come into effect.

Treasury sources said that it had never been the intention to “go after” the worldwide earnings of nondoms and blamed “careless drafting” of an HM Revenue & Customs (HMRC) consultation paper for the confusion.

The “clarifications” were issued in a letter from Dave Hartnett, acting head of HMRC, to City institutions and employers whose workers were likely to be affected.

The Chancellor’s moves were given a cautious welcome in the City, which has mounted a fierce campaign against his earlier proposals. Business leaders have said that some of the most talented lawyers, bankers, insurance brokers and industrialists would desert Britain if he went ahead.

The Government also promised to consult with authorities in the United States on finding ways of ensuring that Americans domiciled in Britain are not taxed in both countries over the £30,000 charge that will still be levied on nondoms.

However, the episode will increase criticism of Mr Darling’s brief tenure at the Treasury, amid fears that proposed changes to capital gains tax and treatment of nondoms have dented Labour’s relations with the City.

Downing Street issued strong backing for Mr Darling last night and said it was “rubbish” to suggest there had been a deterioration in relations.

Senior sources said that there was no chance of moving Mr Darling from the Treasury now or in any future reshuffle. “Moving the Chancellor would be the most destabilising thing [the Prime Minister] could do, which is why the Tories are pressing for it,” a source said.

The Chancellor has left untouched the central proposal of a charge of £30,000 on non-doms who have lived in Britain for seven years. The Conservatives have proposed a £25,000 charge but they had also promised the nondoms that there would be no interference with their overseas income.

One City expert said that Mr Darling had a reverse Midas touch, with everything he touched turning to dust.

Mr Darling’s changes follow a call from George Osborne for Labour to adopt the Tory plan. Last night the Shadow Chancellor said that the Conservative Party was once again driving the Government’s economic policy.

However, Mr Osborne is certain to face pressure, as an election nears, for changes in his own plan, which Labour claims is more draconian than the Government proposal.

He wants to raise £3.5 billion from a £25,000 charge on 150,000 non-doms. Mr Darling expects to raise only £650 million.

Meanwhile, in another development last night, Mr Darling asked Sir Richard Branson’s Virgin Group to improve its offer for Northern Rock.

Virgin remains the preferred bidder but has been told by the Treasury that unless it ups the stakes, nationalisation remains a real option.

The Treasury wants Virgin to offer more for the billions in financial support being provided by the Government. It also wants a larger potential stake in the bank for the taxpayer, via a warrant over the bank’s shares.

Northern Rock’s managment has been told that its proposed rescue package is substantially worse than the Virgin offer.