Should I put my money in an offshore account?

Offshore accounts have made headline news recently, this is thanks to the release of what has become known as the ‘Panama Papers’.

Offshore accounts are typically associated with the rich and wealthy, but despite their implication with avoiding paying tax, they are not dubious in their nature.

In fact, they are quite helpful to own if you are paid in currency other than sterling, and you do not have to be wealthy to own one.

What are offshore accounts?

An offshore account is any account that is not located with holder’s country of residence, for this instance – the UK.

Anyone over the age of 18 can open an offshore account and they are most commonly employed to deposit foreign currency, such as dollars and euros.

Many offshore accounts require you to deposit at least £5,000 or £10,000 when you open one, however there are others that only ask for a £1 minimum sum.

Who offers offshore accounts?

Most banks or building societies on the high street are capable of offering offshore accounts. This is as well as all the many private banking institutions.

You will find that the majority of offshore accounts are located on the Isle of Man or the Channel Islands. This is because that although they are situated near to the UK, they have separate tax jurisdictions.

Why should I open an offshore account?

The most typical reason people tend to open these kinds of accounts is if they work abroad, travel overseas on a regular basis or if they have chosen to retire in another country.

Having the capability of depositing your money in the same currency to which you were paid, for example your salary or your pension, eliminates any chance of negative exchange rate fluctuations.

Pros of owning an offshore account:

If you are astute with your exchange rates, you could actually keep an eye on them and convert your foreign currency back to pounds when sterling is weak.

This boosts what you have on deposit.

Cons of owning an offshore account:

Operating costs of offshore accounts tend to be high. Withdrawing cash from one can cost up to £25 a time.

Are there different types of offshore account?

There are two types of offshore accounts, variable and ones with fixed interest rates.

As with most kinds of savings accounts, variable rate accounts usually allow you to access your money easily and quite often have good introductory bonuses.

Because fixed rate accounts have better rates, they typically want to hold onto your money for longer, so it is harder to access your money, once it is in one. You will find that a fixed rate account will ask you to lock your money away for anything from 5 to 10 years.

What are the tax implications?

Before April 2016, savings accounts would have the interest taxed at the basic rate of 20%. However, offshore savings accounts paid interest without deducting this tax.

After April 2016, you will now find that savings and offshore savings accounts pay interest without any tax deducted.

This is because of a new Personal Savings Allowance.

Personal Savings Allowance

  • Basic-rate taxpayers pay no tax up to first £1,000 of interest
  • Higher-rate taxpayers pay no tax up to first £500 of interest

Any interest earned above these thresholds is taxable.

Is my money protected in an offshore account?

Most savings accounts are covered by the Financial Conduct Authority (FCA). This is because banks and building societies in the UK are protected by the Financial Services Compensation Scheme (FSCS).

This law protects the first £75,000 held with each banking institution.

However, as offshore accounts operate outside of the UK, this law does not protect them. Therefore, even if your bank or building society has an onshore branch in the UK, your money is not protected.

You should check with your bank before opening an offshore account to see whether your money will be protected by a different insurance policy.

There are banks that operate compensation schemes specifically for offshore accounts.

The Isle of Man’s Depositors’ Compensation Scheme protects up to £50,000 per individual saver, and banks licensed by the Guernsey Financial Services Commission protects the first £50,000 per person.

Any savings interest should be declared via a self-assessment form to HMRC.