Offshore banking

Find out more about the pros and cons of offshore current accounts and savings accounts and why they're not just for the super-rich.

Key points

  • Offshore banking is useful for those who need banking services abroad or those who want to transact in different currencies
  • Monthly fees and transaction fees may apply
  • You still need to pay tax on savings interest in offshore accounts and could face fines and prosecution if you try to avoid it
  • Security and compensation for savings will depend on the regulations of the state where the bank is based

Offshore current accounts and savings accounts may be associated with negative connotations with regard to issues such as tax evasion and criminal activity, but the truth about them is far more mundane.

They’re simply bank accounts held in a different country to the one in which you reside and they may be useful if, for example, you work abroad or own property in another country.

If you regularly transfer money overseas or need to bank and save in other currencies, then an offshore account could be right for you.

Features of offshore current accounts

Offshore accounts can be used to transact in foreign currency and are especially useful if you’re paid in a currency other than sterling.

They can be held in dollars, euros and other currencies, but also in sterling.

Traditionally, offshore banking has been popular in low tax or tax haven locations, such as the Channel Islands, the Isle of Man and Gibraltar.

However, as you’ll still be subject to the tax regulations of your country of residence you’ll need to declare all interest earned for tax purposes, so these days offshore banking is more commonly used to make transactions in multiple currencies rather than to dodge tax.

Some offshore current accounts offer free international transfers between currencies, which means you don’t have to pay commission or exchange rate charges.Pound coins and a £5 note

This allows you to transfer your money easily and make sure you move money when it’s right for you.

Accounts also have features you would find with a standard current account, including a debit card, mobile and online banking.

Some accounts also offer extra features like travel insurance, which might be useful for customers who are likely to travel regularly.

Offshore savings accounts

Offshore savings accounts work in much the same way as standard savings accounts. Interest fluctuates, but there may be little difference in rates when compared to UK savings accounts, meaning that their main appeal tends to be being able to save in currencies other than sterling.

This may be useful if you’re planning to save and move abroad, are planning on buying property overseas or want to retire to another country.

While offshore accounts may seem attractive, look into rates of interest in the UK first before committing to paying fees that may not justify the interest rate

You may choose to use an offshore account to boost your money by saving in one currency and then converting the cash back into sterling when the exchange rate is favourable.

However, you could risk losing money if you’re forced to change back to sterling when the exchange rate is less profitable.

Like standard savings accounts, offshore accounts can either be variable or fixed interest.

It’s important to shop around for the best interest rates on your savings and work out where to get the most out of your money.

While offshore accounts may seem attractive, look into rates of interest in the UK first before committing to paying fees that may not justify the interest rate.A piggy bank wearing a pair of sunglasses

Deferred interest savings accounts

Some offshore savings accounts take maximum advantage of tax benefits by deferring the payment of interest on money in the account.

Some accounts let you take the interest whenever you want, while others pay all interest accrued when the account is closed.

Of course, once interest is paid, you'll still have to pay the tax you owe on it.

These accounts might be useful for someone who expects their tax status to change in the future; for example, people who expect their income to fall enough to place them in a lower income tax bracket.

Is offshore banking safe?

Depositor protection in offshore locations

  • Jersey, Guernsey, the Isle of Man and Gibraltar are amongst the countries that offer guaranteed savings schemes

Money saved in an offshore account isn’t covered by the Financial Services Compensation Scheme (FSCS), which means your money won’t get the same level of protection as if it was saved with a bank or building society in the UK.

Some offshore locations now have their own financial compensation schemes, meaning that some of your savings would be guaranteed if your provider went under.

Other places do not protect savings at all, though, so it’s important to know what’s in place to protect your money.

The cost of offshore banking

Due to the nature of offshore bank accounts monthly fees are often payable - and these can be steep.

Offshore accounts may stipulate other requirements, such as a fairly sizeable minimum balance being kept in the account.

There may also be transaction charges to take into account, such as for transferring money out of the account, although you may have a monthly ‘allowance’ of transactions that are allowed before you have to pay.

Who uses offshore banking?

If you spend a lot of time overseas, you might well keep your UK-based bank account and perhaps open a local account as well.

This can get expensive when it comes to transferring money though, so there are a few groups of people who may typically benefit from all that an offshore account has to offer.

Expats

If you live or work abroad but still need to make transactions back home as well, there are advantages to having an account you can have your salary paid into in the local currency.

If your account also lets you hold a sterling account alongside it, this could be useful to pay bills or dependants in the UK.

Landlords

Whether you own a property abroad that you’ve let, or you’ve moved abroad and rented out your UK home, an offshore account could make it easier to receive rent and pay out for bills and mortgages in the relevant currencies.

BriefcaseBusiness people

If you need to travel frequently for business, an offshore account could be handy for being able to make transactions in different countries using different currencies.

Retiring abroad

If you retire overseas, you might still want an account that lets you make sterling transactions in the UK as well as for general use in your new resident country.

Do I need to be rich to have an offshore account?

Some offshore accounts require you to deposit large amounts in order to open one, as much as £10,000, so they’re not necessarily for those starting out.

However, there are some offshore accounts which can be opened with just £1 deposit, so they’re not out of reach.

Tax on offshore accounts

Despite their reputation as a tool for some ‘creative’ accounting, you’re liable for tax on the interest you earn from offshore savings.

If you attempt to use an offshore savings accounts to dodge tax and are caught, you’ll have to pay back what’s owed, plus interest and a fine.

UK current and savings accounts usually pay net interest, which means tax is already deducted. However, interest from offshore savings accounts is paid gross, without any tax deducted.

You will still need to declare any interest earned on an offshore current account or savings account.

One benefit of an offshore account, however, is that there’s often a delay between earning interest and having to pay tax on it.

This means that you could earn a small amount of extra interest which you wouldn’t otherwise get.

Could I get taxed twice?

Before depositing your money in an offshore account, check that you’re not liable to pay overseas tax on the interest you earn.

It’s unlikely that you’ll have to pay tax twice, as the UK has over 100 double taxation agreements with other countries to help expats.

If you are liable to pay tax it’s likely that you’ll be able to claim UK tax relief.

By Emily Bater