Posted on: 2nd September 2020 in Financial Planning
There are numerous benefits to offshore banking.
Not only do they offer expats an alternate way to manage their finances abroad, but they can also simplify the process.
Here, we break down what you need to know about offshore accounts and some things to consider before opening an account.
As the name suggests, offshore bank accounts are held in a foreign jurisdiction. In other words, these are accounts held outside the holder’s country of residence.
Offshore bank accounts allow you to make and receive international payments. They can also be used to hold money in savings and investments.
It’s not only private banking services that offer these types of accounts. Most high street retail banks such as Lloyds Bank and HSBC have offshore banking options.
A common misconception is that offshore banking services are only for high-net-worth individuals (HNWI).
While some require a large initial deposit to open an account, others have a much lower minimum deposit to access.
There are several reasons why someone may decide to open an offshore account.
However, one of the reasons is to make managing international financial obligations more straightforward.
This makes them a good option for those who need to make international payments or transfers or those paid in a foreign currency by their company. For expats, this is often the case.
Offshore accounts also typically offer a favourable foreign exchange rate and, in some cases, fee-free global transfers. So, these accounts could benefit those with assets abroad, such as property.
It’s not uncommon for expats to keep a property back home and rent it out while they are gone, especially if they plan on returning one day.
Offshore banking offers a wide range of benefits. While different accounts will offer their own unique features and benefits, we have compiled a list of some of the common ones below.
Offshore accounts are ideal for receiving different currencies. The ability to receive money in more than one currency is favourable for two reasons.
Firstly, offshore accounts can help to avoid exchange commission fees. Offshore banking can also minimise the risk of currency fluctuations.
Because offshore accounts allow multiple currencies, you can hold on to your funds until the rates are more favourable.
While some offshore accounts are located in so-called tax havens, you must declare any interest earned to the relevant tax authority. This will be HM Revenue and Customs (HMRC) for UK expats.
How tax-efficient offshore banking depends on several factors, such as your tax residency status. And while you may still need to pay tax on offshore savings and investments, there are still benefits.
Generally, there is a substantial delay between earning interest and paying tax on it. As a result, the money stays in your account longer, allowing it to accumulate more interest.
Offshore banking clients typically also benefit from higher interest rates. However, this all depends on the account type you choose.
Having your money held in offshore jurisdictions can provide a certain level of security.
While savings are highly regulated in the UK, not all countries offer the same protection.
Your financial assets could be at risk if held in a country with an uncertain economic climate. If this is the case, offshore banking locations may offer greater economic stability and protection for your savings.
Like onshore banks, those located offshore also provide around-the-clock access to help and support as standard. Most also offer online banking facilities to make it easier to manage your money.
Offshore banking can open up a wider range of investment products.
In simple terms, an offshore account gives you more flexibility.
Rather than having an account at home and one in the country they are living in, expats can have their money in one central location.
So, no matter where you move, you keep the same account. This alone is a huge benefit for expats.
Before opening an account, here are a few things to consider.
The costs and fees associated with an offshore account can soon mount up. For example, withdrawal fees can be as high as £25, making them less attractive for those who need regular access to their money.
Some other fees to be aware of are:
Fees and charges are dependent on the account itself. Some will be more expensive than others depending on the use case.
The location of offshore bank accounts is important.
Your money may not have the same level of protection that it would with a domestic bank in the UK.
In the UK, your money is covered by the Financial Services Compensation Scheme (FSCS). Any savings up to £85,000 held in authorised UK banks are protected.
However, some offshore banking jurisdictions are covered by similar schemes. It’s essential to see what protection the bank offers before opening an account.
You are liable for all income tax, and capital gains tax on all savings and investments held offshore.
Your tax residence status determines if and where you are liable for tax. Just because you work overseas, it doesn’t mean your tax residency has changed.
Tax residency is a complex topic but essential to understand, especially as an expat. If you are unsure, speak to a professional who can advise you based on your situation.
While offshore banking offers a range of benefits, there is also a lot to consider. Finding the right product for you is essential, and speaking to an experienced financial adviser can help.
At Holborn, we provide expert wealth management advice and solutions to clients globally. We specialise in the expat market, so we know the challenges they face when managing their finances.
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