Offshore savings accounts
Offshore savings accounts are no longer the preserve of the super-wealthy. Thousands of Britons who choose to live and work abroad now enjoy the flexibility afforded by depositing money outside the UK.
Easy does it: check compensation before anchoring your savings.
But there are dangers attached to depositing your life savings offshore, as the collapse of the Icelandic banks Kaupthing and Landsbanki in 2008 show.
The basics
Accounts are typically run from the Channel Islands, the Isle of Man and Ireland. Among the many banks offering such accounts are subsidiaries of big High Street names such as Nationwide, Yorkshire Building Society and Northern Rock.
Many private banks also offer offshore accounts. Anyone is eligible to open an offshore account, but the minimum deposit is usually at least £5,000, with £10,000 the norm.
The advantages
There are a number of benefits offered by depositing money offshore. Many accounts are multi-currency, allowing you to deposit money in sterling, euros or dollars and withdraw cash or write cheques in any country. Unlimited access to your account is also useful for business people who frequently move through time zones.
Residents of the UK can gain from the tax rules governing offshore accounts. Interest is paid gross without income tax being deducted. Although you still have to declare the interest as income on your self-assessment return, this time deferral can benefit big savers as the account can roll up payments and earn interest on the gross, producing a bigger final payout.
Until recently, offshore savings accounts offered higher rates of interest than their onshore equivalents. This is seldom the case now.
The disadvantages
It's worth remembering that offshore institutions are not covered by UK Financial Services Compensation Scheme. Some banks and building societies say they will meet any liabilities that their offshore subsidiaries cannot cover out of their own assets, but not all are this generous.
Some offshore centres or 'Crown Dependencies' have decided to guarantee all funds lost in the Icelandic collapse, such as the Isle of Man, whereas others have not, such as Guernsey.
Guerney brought in a compensation scheme for their savers in 2009, but this is too late for the those depositors who have lost money (however the Isle of Man has had one in place for over 15 years).
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Types of account
These include easy access accounts, notice accounts (where notice periods of 180 days before withdrawals are typical), no-notice accounts, fixed-rate accounts and monthly-interest accounts.
It may be possible to operate some of these accounts via branch, post, telephone or the internet. Account features such as minimum balance requirements, minimum amount of transaction, whether a cash card is available, any limits to the number of withdrawals, and any rate of bonuses or guarantees will vary depending on which account you choose.
Offshore investing
Investing rather than saving overseas can also bring advantages to UK residents as well as those who live or work abroad, however. This applies particularly to investment bonds. When the bonds are held in the UK, income is paid net of tax.
However, with an offshore fund, no tax is deducted and the income can be rolled up gross over a number of years. The fund becomes liable to tax only when the holder brings the money back to the UK.
Offshore trusts can be a good way of reducing inheritance tax liability. Money put in trust, perhaps for grandchildren, can be rolled up untaxed until the child reaches a certain age. The effect of interest on interest helps the fund grow faster.
Tax will then be payable, but it will be at the basic rate as long as the child is not a higher-rate taxpayer. Provided the donor has lived seven years since setting up the trust, the money will be free of inheritance tax.
- Updated by Alan O'Sullivan, April 2009
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