Guide to offshore accounts
Offshore accounts may have a bad reputation for tax avoidance, but that’s not what they are designed for. Unfortunately, there are some people – often the mega rich – that do try to use offshore accounts for that reason, but in reality, the vast majority of account holders are legitimate.
It’s possible that an offshore account could be suitable for any number of people, but as they work in a completely different way to UK bank accounts, it’s important to understand how they work before opening one.
What are offshore accounts used for?
Offshore accounts are often beneficial to people that work or live abroad, travel overseas regularly, are planning on retiring abroad, or just want to take their money to a more financially stable country.
There is a preconception that offshore accounts are only for multimillionaires hoping for a tax break, but while many do have high minimum deposits, there are some that can be opened with just £1.
Where can I open an offshore account?
Most of the major high street banks and building societies do offer offshore accounts through their subsidiaries, although they are available from private banks too. The vast majority of offshore accounts for UK citizens are held on the Channel Islands or Isle of Man.
Types of offshore account
In most cases, offshore accounts are savings accounts rather than current accounts. As with a standard savings account onshore, the interest is either fixed or variable, but the latter usually allows withdrawals, whereas fixed accounts often mean the money has to be locked away for a set period.
When comparing different accounts, it’s important that people are aware that the advertised rate of interest is often inflated with an introductory bonus.
While there are some offshore accounts that are suitable for many people and can be opened with £1, most do require at least £5,000 or £10,000. This usually means they are inaccessible to most people.
Will I be taxed?
One of the many benefits to an offshore savings account is the difference in the tax legislation. While the basic rate of tax is still 20%, an offshore account pays interest on the gross amount, whereas in the UK, interest is only paid once the tax has been deducted.
This can be beneficial, but does not provide easy access to tax-free savings. Any offshore accounts and income earned from them, has to be declared on the annual self-assessment and submitted to HMRC.
Don’t be tempted to exclude any earnings, because if caught account holders will face a hefty fine and have to repay outstanding tax plus interest.
Offshore accounts are not tax-free, but because of the way the tax is deducted and interest paid, it can provide better returns than onshore savings. Are Offshore Accounts safe?
All UK current and savings accounts are covered by the Financial Service Compensation Scheme (FSCS), which protects savings up to £85,000 per person for each bank or financial institution.
Offshore savings accounts are not covered by the FSCS, so it’s worth finding out more about the compensation schemes from the other crown dependencies. Both the Guernsey Banking Deposit Compensation Scheme and Isle of Man Depositors Compensation scheme protect up to £50,000 per person.
While not offering tax-free savings, offshore accounts can be more tax efficient because of the system in place. It might not make a difference on low deposits, but it could have a significant impact on savings in the hundreds of thousands.
Some offshore savings accounts also have higher interest rates than those on UK soil – although it is worth noting whether the AER includes a bonus rate, which will likely expire after 12 months.
Offshore accounts also do not have to be held in sterling, meaning that people can manage their money in dollars, Euros or any other currency. This can avoid losing money due to the exchange rate.
Although there are advantages to offshore savings accounts, they are only suitable for a small group of people as the cons often outweigh the pros.
The minimum deposit can exclude a large number of people from offshore accounts as few want to lock away £5-10,000. As well as needing a hefty opening balance, some accounts also charge high fees and require account holders to have a minimum income level.
The fees for making a withdrawal can often be in excess of £20 a time, meaning that they are not suitable for many people.
Although very rare due to double tax agreements, in some cases, account holders might be taxed twice: overseas tax and UK tax. However, in this instance, it is likely that people will be able to claim tax relief.