When you think of offshore savings, you might call to mind images of globetrotting millionaires who deposit money with overseas institutions in order to avoid tax. While there may be a grain of truth in this, many of the myths surrounding offshore savings aren't based in reality.
An offshore savings account may or may not be the right product for you, depending on your personal circumstances – but, before opening one, it’s important to understand how they work and how to find the best account.
What is an offshore savings account?
An offshore savings account is a savings account based outside of the UK.
Many of our banks and building societies have an offshore arm, for example, Lloyds Bank International Limited and Skipton International.
You are typically required to invest a minimum of £10,000 to open an offshore savings account, so these accounts are unlikely to be suitable for first-time savers.
Will you get a better return?
While offshore savings accounts often come with attractive-looking interest rates, these may not be any better than the rate you could get from a top UK-based savings account.
Also, charges for operating an offshore savings account can eat into your returns, for example, fees for making a withdrawal can be as high as £25 a time.
How do you open an offshore savings account?
If you’re applying for an offshore account with an overseas branch of a financial institution, you’ll need to send your application forms directly to them.
They will require you to provide proof of your identity and address - for example, a certified copy of your passport or driving licence, plus recent fuel bills or bank statements.
As with any other savings account, it’s important to shop around for the best deal before committing to a particular product. Banks operating in the Channel Islands, Gibraltar and the Isle of Man feature on price comparison websites such as Moneyfacts and MoneySupermarket.
Once your account is open, you should be able to make your initial and subsequent deposits by posting a cheque or arranging an electronic transfer from another account (most offshore banks allow you to deposit cash in different currencies).
However, nowadays it’s more likely you will open an offshore savings account and transfer your initial deposit over the internet.
Do you pay tax on offshore savings?
Yes, you are liable for tax, although interest from an offshore savings account is often credited ‘gross’, ie without any tax deducted from it.
Ultimately you do have to pay any UK income tax due, although there can be a substantial delay between earning interest and having to pay tax on it. For example, if interest is paid once a year at the end of April, you could hold the previous year’s interest in your account for up to 20 months. This ‘deferral’ of the income tax payment due on your offshore savings could allow you to earn a small amount of extra interest.
If you use an offshore savings account to evade tax and are caught, you will have to pay HM Revenue & Customs whatever you owe, plus interest and a fine.
Depending on where your offshore savings are based, you may be liable for overseas tax, as well as UK tax.
It’s important to investigate this before depositing your money, although more than 100 double taxation agreements exist between the UK and other countries to help prevent this situation arising. Where this is the case, you should be able to claim UK tax relief on the tax you pay overseas.
Are offshore savings protected?
Before you open any savings account, it’s vital to ensure you understand how your money would be protected, if at all, in the event of a provider’s collapse.
Money held in offshore financial institutions is NOT covered by the UK’s Financial Services Compensation Scheme so your cash will not have the same standard of protection it would get if you saved with a bank or building society based in the UK.
The location of the financial institution you choose may not be immediately obvious from its website – but it will affect whether your money is protected if it went bust.
Several popular offshore locations, such as the Isle of Man and Guernsey, have their own financial compensation schemes so, as in the UK, a proportion of your savings is guaranteed should your account provider go bust.
It's worth remembering, however, that each country's depositor protection scheme is only as strong as the economy of that country.
Here in the UK, the FSCS is backed by the UK government, which is highly unlikely to ever go bust. Smaller economies could be more vulnerable, however. That's why Which? does not recommend that anyone puts their money into an account that does not have full UK FSCS protection.
In addition, you should investigate the standard of financial regulation in the country you’re considering: are there controls on who can set up a bank and how it is run? You may want to think twice about saving money in a location where there is little regulation in place.
It’s also worth checking whether there is a consumer complaints system in the country where your savings will be held. Should anything go wrong with your account, it’s important that you’re able to seek redress in a simple manner – and in a way that won’t cost you any extra money.