An offshore account can still be a winner

Published on Friday 22 August 2008 23:11

EACH week The Scotsman gives you a top ten guide to pertinent financial issues. Offshore bank accounts have become increasingly popular as people have grown wealthier and more Britons work abroad, are domiciled overseas for part of the year or retire there permanently.

But while they still offer advantages to many individuals, some of the previous tax-efficient benefits have been closed down by HM Revenue & Customs. Neil Ritchie, head of tax services at Edinburgh-based solicitors Murray Beith Murray WS, offers ten tips on offshore bank accounts and their tax treatment.

1 WHERE IS OFFSHORE? Approximately three million UK residents are believed to own an offshore bank account. The most popular locations in which UK offshore bank accounts are held are the Channel Islands and Isle of Man. However, others include the Cayman Islands, Switzerland and Liechtenstein.

2 WHO BENEFITS? Offshore bank accounts are convenient, and potentially tax-efficient, for people who work abroad, UK expatriates and people planning to spend their retirement in a sunnier climate.

3 TRAVEL BROADENS THE BANK BALANCE For years, offshore accounts have been most effective for UK residents who have come to the UK from other countries and are not UK domiciled. Such people were originally able to maintain offshore accounts and by arranging matters carefully, remit funds to the UK and still avoid paying any income tax. This arrangement, known as source ceasing, was closed down by the Finance Act 2008. The principal benefit now for non-domiciled UK residents is when they travel abroad, as during these periods, they can access their offshore funds without triggering a UK tax liability.

4 CHECK THE GUARANTEES Offshore accounts often provide better interest rate returns than those onshore but the guarantees may not be as good. If a bank registered on the Isle of Man collapses, investors are guaranteed to receive 15,000 of their investment, compared with 35,000 for accounts with UK-registered banks. With Channel Islands banks, there is no guarantee.

5 PAYOFF IN POSTPONEMENT For UK domiciled residents, the main advantage of offshore accounts is about delaying, rather than avoiding, tax. Payment of tax can be postponed for up to 21 months after the date that applies to a conventional savings account in the UK. Consequently, individuals with large cash reserves can earn more in interest – compared to a conventional savings account – during the additional breathing space before the tax bill falls due.

6 ANYTHING TO DECLARE? Residents of the UK are required to declare all their offshore accounts, held for whatever purpose, to HMRC. Last year, HMRC contacted several major high street banks for information on all their offshore accounts. At the same time, it offered those customers who voluntarily owned up the chance to escape the full penalties that can be incurred for non-disclosure, while threatening severe financial repercussions for those who did not. The initiative is believed to have clawed back about 400 million from offshore account holders in tax.

7 THE PENALTY Those account holders who co-operated with the amnesty – in HMRC jargon, the Offshore Disclosure Facility – generally had to pay tax owed, plus interest and a levy of 10 per cent of tax owed.

8 NEW TARGET LISTS HMRC is believed to be considering drawing up a second list, containing the names of up to 170 smaller banks, building societies, and even IFAs, who will be contacted for similar information.

9 LAST CHANCE TO OWN UP? The Offshore Disclosure Facility has now been withdrawn but HMRC says that those who decided not to take part have a final opportunity "to put things right". Co-operation (by the account holder) will be taken into account in determining the penalty, but this is unlikely to be less than 30 per cent of tax and duties owed.

10 YOUR PAPERS, PLEASE Tax officials have gained greater powers to probe accounts in offshore havens such as the Channel Islands. Last year HMRC won a landmark case which gave it the power to force Barclays to hand over the details of thousands of its offshore customers' accounts and four more banks – Lloyds TSB, Royal Bank of Scotland, HSBC and HBOS – were forced to follow suit.