Most people are familiar with the term ‘offshore account’ but may think they’re solely the preserve of the rich and famous. However, this is not the case.
Offshore accounts are simply savings accounts that are located and hosted outside of the country where you live. These accounts allow savers to hold accounts in different currencies.
Are offshore accounts tax havens?
No. While you may have seen a few stories in the press with high profile names seemingly dodging tax by stashing their savings offshore, in reality you’re liable for tax on interest earned offshore just as you are with a UK-based savings account.
Why would you want an offshore account?
As you can save money in other currencies, the accounts can be used to store dollars and euros (among others). This is useful for people who are payed a salary that isn’t in sterling. Most offshore accounts can be opened by anyone, as long as they’re over the age of 18. Some accounts, however, are limited to people who live outside the UK.
How much is it to open an offshore account?
It’s sometimes necessary to put down quite a chunk of cash to open an offshore account. Many expect an investment between £1,000 and £10,000, but it is possible to find accounts with much lower minimum deposits and some where there is no minimum deposit stipulated.
The types of offshore accounts available are basically the same as the savings accounts we’re used to in the UK. Some offer variable interest rates and some offer fixed rates. The former can come with introductory bonuses and make it easy for you to access your cash, while the fixed rate accounts will usually require the money locked away from between one and five years.
Tax implications of offshore accounts
It used to be the case that standard savings accounts would pay interest after tax was deducted at 20% (basic rate), while offshore accounts paid interest without first deducting tax. However, in April 2016, this changed and now both offshore and standard savings accounts pay interest without deducting tax first.
This is because of the introduction of the Personal Savings Allowance, which states that basic rate taxpayers don’t pay tax on the first £1,000 of interest and higher rate taxpayers don’t pay tax on the first £500. Once you’re above those thresholds, however, then you do have to pay tax. This prevents offshore accounts being used to avoid paying any tax.
What type of protections are there with an offshore account?
If you save in an authorised bank or building society account in the UK, then the first £85,000 of your savings (in each institution’s account) is protected by the Financial Conduct Authority (FCA). Offshore savings accounts in EU countries are protected in the same way albeit the guarantee is expressed in Euros as opposed to sterling. Unfortunately, in the case of offshore accounts outside the EU you need to check whether there is a government guarantee scheme in place..
It’s always advisable to check with the provider before you open the account to see what types of protections might be in place. For example, banks that are licensed by the Guernsey Financial Services Commission (GFSC) are covered by a scheme that protects the first £50,000 saved (per person, per bank).
Is an offshore account right for you?
It might not be for everyone, but if you live or work abroad, regularly travel, or even plan to retire to another country in the future, offshore savings accounts could be part of your long-term financial plan. As you are saving in the same currency that you are planning to use for your retirement, for example, you are protected from changes in exchange rates.
However, if your plans are more modest or you want to ensure you have fast access to your money, they may not be right for you. The sometimes high operating costs make them less practical for some people.
If you’d like to discuss the merits of opening an offshore savings account, then contact the team at Turner Little.