Offshore Savings Accounts

The Pros and Cons of Saving Offshore

– What is an offshore account?

Many Britons live and work abroad today, and for these people an offshore account is almost a necessity. While wages and salaries can be paid into a UK based account and money withdrawn fairly freely around the world, financial transactions are far more easily conducted through accounts held in the country where one works or lives.

For other people there are certain attractions to saving money in an offshore account, though there are also drawbacks. Once the preserve of the wealthy, off-shore accounts are now opened by many. Most commonly such accounts are administered in the Channel Islands, Isle of Man, and Ireland. Most high street banks will offer customers the opportunity and services of offshore banking.

The benefits of offshore accounts

Offshore accounts can be opened with far smaller amounts now than was previously possible. Some can be opened with as little as £1, though more commonly there is a minimum opening deposit of £5,000.

Many accounts can be operated with multiple currencies, meaning deposits and withdrawals can be made in sterling, euros, or dollars. This is particularly important for those who travel a lot, perhaps because of work.

Interest is paid gross on offshore accounts, meaning that no tax is deducted at source, unlike accounts in the UK that have income tax deducted before you receive it. Although tax has to be paid on the interest earned, by way of declaration on self-assessment forms, there will be a delay between the earning of interest and the paying of tax. During this period, extra interest will be earned on the money that would otherwise have already been paid in tax.

The disadvantages of offshore accounts

With usual minimum opening balances of £5,000, or even £10,000, it is clear that an offshore account is not designed for the person just starting out on a life of saving and investment.

Because they are held offshore, the savings are not covered by the Financial Services Compensation Scheme (FSCS). If the institution that holds your money falls into liquidation, you may have no way or recourse to claim any of your savings back. Whilst some banks and building societies have committed to meeting any such liabilities of their offshore subsidiaries, they are not committed to by law, so care should always be taken.

It used to be that offshore accounts attracted a greater rate of interest, but that is rarely the case nowadays. Often UK accounts pay a similar rate of interest, though, of course, tax is deducted at source in the UK and has to be claimed back by non-taxpayers.

Types of offshore account

Account types are mostly in line with UK based accounts. You’ll find that you can source instant access accounts, notice accounts, fixed rate and regular deposit accounts. Many accounts can be operated online, or by telephone, and posted cheque deposits are often accepted. Different providers will offer different specific features, including cash cards, withdrawal limits, currency availability, and minimum balance requirements.

How about investing offshore?

A particular advantage for investors when considering investing offshore is the tax treatment of investment bonds. An investment bond that is UK domiciled is subject to tax on income and capital gains within the bond structure. This tax cannot be reclaimed, and so investment performance over a period of time is negatively impacted.

However, the same tax structure does not apply to those bonds invested in an offshore fund. The effect of this is that income and gain made by the life company that administers the offshore bond is not taxed, and return is therefore rolled up over the lifetime of the bond. When the bond is cashed in, or matures, and the resulting funds are transferred back to the UK, only then will tax be liable.

Further, for those worried about inheritance tax, then an offshore trust could be used to the advantage of beneficiaries. Money put in trust, and interest earned and gains made within the trust, can be rolled up untaxed until a child reaches a certain age, for example. Tax then becomes payable, but if the child is not a higher rate tax payer then only at the basic rate. Further, if the donor lives for more than seven years after the trust is set up, then the money under the trust will be inherited free of inheritance tax.

In conclusion

There are many reasons that you might decide to open an offshore account. These include ease of use for work purposes, savings and investments, and inheritance tax planning. But they should not be opened without thought, and tax considerations, as well as savings protection, should be a priority concern. All this said, an offshore account could help diversify your savings and investments and be used to help achieve your longer term financial goals.