How the elite use offshore savings to grow their wealth – and how you could too

Offshore bank accounts conjure up images of secret briefcases stuffed full of cash, out of sight of the taxman. But they are not just for the elites – you too can open one and potentially earn more interest. 

Telegraph Money outlines the benefits of offshore bank accounts, as well as the risks.

Jason Porter, of the financial adviser Blevins Franks, said: “The wealthy who own businesses, real estate and other assets around the world use offshore centres because they offer stability and confidentiality, as well as a certain degree of asset protection. 

“When assets are spread across numerous jurisdictions, an offshore bank will have the inhouse experience and expertise to deal with cross-border transfers and cashflows.” 

He said modern banking technology “has meant that many offshore banks could offer their services to people far further down the financial ladder than they used to” but “they maintain the financial barriers to entry to retain the exclusivity and attraction to the wealthy”. 

Other banks have exploited this technology to widen their market. But in most cases Mr Porter said they would “maintain some degree of financial qualification”, such as a minimum balance. 

Opening a bank account overseas is often a requirement if you are buying real estate in another country. For example, if you are buying a holiday home in Spain or Portugal, part of the process requires you to open a bank account there, through which the funding will flow. 

New arrivals to the UK who intend to use the tax advantages of being a “non-domicile” (“nondom”) can also benefit. 

Mr Porter said there was a perception that offshore accounts might provide a greater degree of confidentiality and asset protection in the event of a divorce, for example. 

He said this “has been tarnished” to a degree by the Panama and Paradise Paper leaks, but for decades privacy rules in places such as Switzerland and Liechtenstein provided “considerable confidentiality”. 

Mr Porter said: “From an asset protection perspective, the starting point for lawyers involved in divorce, bankruptcy or other legal proceedings where your wealth might be under threat is your ‘local’ financial assets – what you own domestically.

“Offshore accounts and investments held in a jurisdiction with strong privacy laws, often where they are held under an asset protection trust (where the individual no longer has legal ownership), are likely to be more difficult to access, adding time and cost to the whole process.” 

Another reason to consider an offshore account is if you are starting a business or buying real estate in a country where there is political instability – it might be safer to use an offshore account to conduct your dealings. 

If you are a British national living in the EU, you might find your UK bank account is being closed. 

Mr Porter said many banks no longer had a licence to serve such customers. 

An offshore account in the Channel Islands or the Isle of Man might offer all the same facilities as a UK account, such as sort codes, which might allow you to maintain your existing direct debits and payments. 

In many cases you will need to maintain a minimum balance to obtain all of the relevant banking services. 

But Harry Bell, director of financial planning at the wealth manager Charles Stanley, said a Swiss bank account was “not something that the average person would gain any benefit from or necessarily even have access to”.

How do the tax benefits work?

Before April 2016, banks in the UK used to deduct tax from the interest paid on savings, but it is now paid in full and HMRC usually taxes it by changing your tax code. 

If you fill in a self-assessment form you include any income from savings. 

Offshore accounts in Luxembourg, Switzerland and the Crown Dependencies used to pay the interest in full, which was part of their appeal to Britons, according to the wealth manager Quilter Cheviot. 

But David Denton from the firm said “the era of using offshore banks to hide wealth has effectively ended”, thanks in large part to common reporting standards introduced in 2017. 

These standards, adopted by more than 100 countries, including those mentioned above, ensure the automatic exchange of financial information across borders, thereby promoting transparency and combating tax evasion.

Mr Denton said: “A commonly held misconception is that income generated overseas is taxed only if it’s brought back to the UK. This has led some investors to go offshore, particularly if they have no immediate need to spend the interest or if they plan to retire abroad. 

“However, the reality for UK residents domiciled in this country is quite different. These individuals are taxed on an ‘arising’ basis, meaning income and gains are reportable and taxable, even if not remitted to the UK, on an ongoing basis.” 

Failure to report income and gains abroad is therefore illegal for those domiciled in Britain and you will end up paying the same amount in tax as you would have if you had earned the money here. 

However, there can be advantages for non-domiciles living in Britain. “Resident non-domiciles have a different tax treatment for a specified period,” Mr Denton said. 

“They are taxed on the ‘remittance’ basis, meaning only income brought into the UK is taxed. After that period, they can opt to pay a fixed rate of tax, known as the ‘remittance basis charge’, to maintain this advantage. 

However, after residing in the UK for 15 out of the past 20 years, resident non-domiciles become subject to tax on the arising basis, just like resident domiciles.” 

He added: “It’s important to note that for resident domiciles, who comprise the majority of the population, there are no inherent tax benefits to offshore banking, regardless of their wealth. However, other offshore products, such as offshore insurance bonds, can provide tax advantages, although expert advice is essential to navigate these waters.”

Can you get better savings rates abroad?

Mr Porter said you could sometimes get better savings rates overseas, particularly where banks might not have to pay the high levels of corporate taxation suffered by banks elsewhere.

James Blower, of the Savings Guru comparison service, said you could earn higher interest rates abroad but there were risks from exchange rate fluctuations.

He said: “I know people who made a lot of money between 2009 to 2012 saving in Australian dollar savings accounts, earning higher interest rates and also benefiting from the Australian dollar’s strengthening against sterling. They made double-digit returns from cash savings but ran big currency risks, which could have gone the other way.”

Britain’s Bank Rate is one of the highest official interest rates among major developed economies, so the gains from putting money elsewhere could be limited. 

US interest rates are 5.25pc-5.5pc, which is higher than Britain’s 5pc (expected to rise to 5.25pc in August). New Zealand’s interest rate is 5.5pc. Interest rates in Canada are the same as Britain’s; they are lower in Australia and the EU.

Very high interest rates are available in other countries but it is worth bearing in mind the risks of investing if you do not understand the market.

South Africa’s central bank rate is 8.25pc. Argentina has the highest interest rate among the G20, according to Trading Economics, a statistics website – but inflation there is running at 114pc, making the currency a risky investment.

Iceland’s rate is 8.75pc, one of the highest in Europe.

Moneyfacts, the data company, maintains a list of some best-buy overseas accounts on its website, moneyfactscompare.co.uk.

Are there any other perks of offshore accounts?

Mr Denton said some people went offshore because of the “allure” of multi-currency accounts. 

He said: “Few UK banks offer multi-currency accounts, which are often limited to a handful of currencies. International counterparts of these same banks, as well as UK ‘challenger’ [new] banks, typically offer a wider array of currencies, making them attractive for those with international financial needs.”

Is your money safe abroad?

One aspect of offshore banking to consider is the comparative lack of investor protection, according to Quilter. 

In Britain, deposits of up to £85,000 are guaranteed under the Financial Services Compensation Scheme, a lifeboat fund, in case of financial collapse. 

Mr Denton said many offshore jurisdictions offered less robust safeguards.

So if you are considering saving your money abroad, it is a good idea to check the guarantees available first.