Is an Offshore Account Right for You?

We’ve put together this guide to offshore accounts, to help you decide whether it’s something you should include in your financial planning.

You may have read about high profile celebrities ostensibly using offshore bank accounts to get out of paying tax, but it’s not that simple and that is not a reason to have an offshore account. You’re generally liable for tax on the interest earned on your savings in the same way as you would be in the UK. Here’s how they work.

 

What exactly is an offshore account?

Offshore bank accounts refer to savings accounts located in a country other than your country of residence. They allow customers to save money in varied currencies, and although you might think you need to be very wealthy to take advantage of the opportunity, that’s not the case.

Offshore accounts can be used to save dollars and euros, among other currencies. This can be useful if your salary isn’t paid in British pounds. You must be over 18 to open an account, and some are only available to people who live outside of the UK.

You’ll generally need to invest over £1000 to open an offshore account, but it is possible to find one that you can open for a lower initial amount. They’re offered by numerous banks and are based virtually anywhere in the world.

 

Should you open an offshore account?

 Whilst they’re not right for everyone, offshore accounts can be useful if you live or work abroad, or you travel regularly overseas. They can also be worthwhile if you are planning to retire to another country. If you can save in the same currency that you want to use to fund your retirement, then it can prevent you from losing out due to fluctuations of exchange rates.

Talking of exchange rates… some people use offshore accounts to ‘play’ rates and try to increase their savings by taking advantage of weak sterling. But this can backfire and lead them to lose out if they have to convert back at the wrong time.

Offshore accounts can have higher operating costs than you may be used to seeing in the UK, with some banks charging a cost per withdrawal, whilst others make a fixed monthly charge for operating an account.  At first glance, this makes them less attractive to people with small amounts of savings or those who want to be able to access their money frequently but if you are careful in the selection process, it should not be a bar to going offshore.

Tax implications of offshore accounts

It used to be the case that offshore savings accounts differed from standard savings accounts by paying interest without first deducting tax. However, since April 2016, both regular and offshore savings accounts do this.

This is due to the introduction of the Personal Savings Allowance. Basic rate taxpayers pay no tax on the first £1,000 in interest. Higher rate tax players don’t have to pay tax on the first £500. But, interest earned above these thresholds will incur tax. HMRC demands you declare savings interest on your self-assessment tax form and pay it later on. If you don’t, then you could face big fines.

 

Is money safe in offshore accounts?

The Financial Conduct Authority (FCA) protect authorised bank or building society savings accounts in the UK. The Financial Services Compensation Scheme automatically protects the first £85,000 that’s held with each financial institution.

Money held in offshore accounts within the EU is also protected to the equivalent sum in Euros as the UK guarantee scheme. Elsewhere you should check with the provider to see whether your money is protected through any kind of scheme. You may be surprised at the number of jurisdictions which now have some level of government backed guarantee scheme in place.