Is Offshore Banking Safe?


Many expats are well-versed in the benefits of banking offshore - particularly for tax reasons. But how safe is it to do this? Iain Yule reports

Even if you still have a place that you call ‘home’ there’s really no compunction to leave your money there too. Most do, drawn by a powerful force called inertia, for which the taxman is most grateful, thank you very much.

For, any income you earn from assets left in your home country is automatically taxed at 20%, often 40%, sometimes 45% (in the case of the UK). So, if you are mobile, why not keep your money moving too?

We’re talking about offshore banking here, which is basically a means of keeping your savings in the most tax-efficient place.

Offshore finance centres where these banks are based do not levy tax on savings income. This means that your money can grow unencumbered by the small matter of income tax. So it can build by as much as 45% more each year.


So, you are suggesting that I become a tax evader?

Heavens, no! Havens, yes. Offshore finance centres are considered safe havens for those who can legitimately avoid unnecessary taxation, but not evade it, which is a criminal offence.

Those who are away from their home country for long periods – frequent travellers, contractors, expats, for instance – may become non-resident. And non-residents often needn’t pay tax in their ‘home’ country. So they can legitimately avoid unnecessary tax.

Those who have income sources in different countries may also find offshore banking useful, as a ‘neutral’ place to build up funds, when several different tax authorities may be competing for a cut of their income.


But how do I become non-resident?

If you are leaving the UK to work abroad you are provisionally considered non-resident from the day you leave. But this beneficial status has to be confirmed by you remaining out of the country – except for relatively brief visits home – for a complete tax year, which runs from 6 April until 5 April the next.

If you have a home abroad, all the better to achieve this status. But you must restrict the number of days you spend back at home. Read a useful guide to this at in the Money section, under Expat Taxation.

These rules apply to Britons moving abroad. But similar rules may apply if you are non-British and moving from your home country to the UK or elsewhere.

If you are unsure of your status you should consult a specialist tax adviser. If you cannot prove you are non-resident, the taxman will want his cut of your money.


Timing seems to be important

Yes, if you have funds on deposit with a bank or building society back home, it is sensible to move these offshore as soon as you know you will be moving abroad. If you can delay the date when interest is credited until after you leave, you could start accumulating tax-free interest even before you travel.

You should close any offshore account before you return so that all interest is paid while you are still outside the tax net.


So, where exactly is ‘offshore’?

Dotted around the globe are many islands with resources beyond their more obvious attractions of unspoilt beaches and pretty fishing harbours. They all want to offer your money a good tax-holiday too.

Many may be in far-flung locations but some of the most important are in relatively close proximity to Europe or the United States.

Numbered among them are the Cayman Islands, Bermuda, the Channel Islands of Jersey and Guernsey, the Isle of Man, the Bahamas and British Virgin Islands.

What they all have in common is a desire to attract international finance to their shores to boost their economies. Many are outposts of the British Commonwealth which have been encouraged to be self-sufficient. And they make themselves attractive by offering low- or no-tax regimes where offshore banks can operate.


How does offshore banking work?

It’s much like normal banking at home, without the tax, and with a range of currency accounts to choose from.

Most of the offshore banks are offshoots of the familiar British, European and American High Street names, so you will not be dealing with anything unfamiliar. They offer cheque accounts, savings accounts, debit cards, credit cards, standing orders, direct debits, money transfer, and so on, just like ‘domestic’ banks.

And you can if you wish with many of the banks operate your account remotely, using the internet. With secure messaging, you can download account information, change account details, send the bank information, and instruct financial transactions.

Indeed, electronic transfer is highly recommended when setting up an offshore bank account. Turning up on one of these islands with a suitcase full of cash to open an account would most likely lead to your arrest.


But isn’t this a bit exotic?

Not in the least, as many hundreds of thousands of people hold their money in offshore banks. The three most familiar and popular offshore finance islands for Britons – Jersey, Guernsey and the Isle of Man – currently hold billions of pounds and other currencies in bank deposits and investment funds.

So accepted has this form of banking become that many internationally mobile executives’ salaries are paid by their employers directly into offshore accounts.


Are you sure this is legal?

Perfectly, as long as you are not using the offshore bank account to conceal money from the taxman, the police, your creditors or a divorcing spouse.


But who polices these havens?

They are strictly scrutinised by international bodies to make sure they are not providing facilities for money launderers or terrorist funding. For this reason you may find that you have to jump through a few more regulatory hoops to open an offshore bank account than you would have to for an ordinary one. This is to establish that your money is ‘clean’.


So, which offshore centre to choose?

Most Britons cut down their shortlist to the British Isles of Jersey, Guernsey and the Isle of Man.

These territories are seen as particularly safe, as they are close to the British way of life, have been relatively scandal-free, are stocked with the big, familiar names in financial services - and yet, they offer similar tax benefits to the more out-of-the-way havens.


Is offshore banking really right for me?

Well, you first have to be sure that there is a genuine tax or other fiscal advantage to be derived from opening an offshore bank account. It may well that you need specialist tax advice to determine this.

But if there is a legitimate tax saving to be had, and you are sure of the safeguards protecting your offshore money, what’s stopping you?


OK, I’m convinced. How do I open an offshore account?

Your financial adviser – if you have one – can supply details.

Most of the High Street banks and building societies have offshore operations, so you could ask for details at your local branch (though it may only be the manager who knows anything about it).

Or go to your bank’s website where you should be able to find directions to its offshore offshoot’s contact details.


If A Bank Goes Bust…

The most popular offshore banking centres, certainly with British expats, are the islands of Jersey, Guernsey and the Isle of Man. Each of these has a depositors’ compensation scheme in the event of a bank based on the island going bust.

Each individual bank account is protected, currently up to a maximum of £50,000 or currency equivalent, should a bank fail. Note though that some banking groups have more than one brand identity as a bank, and the protection applies to your exposure to the group on the island, not the individual bank brand.

Many expats therefore limit their exposure to any one banking group to £50,000 or currency equivalent, that is by spreading their offshore bank deposits across several banking groups, with a maximum of £50,000 placed with each.