Offshore Banking For British Expatriates
December 28th, 2006
Britons living abroad tend to open an offshore bank account to help with their banking arrangements. You will also need to open a local bank account in Spain, but if you retain financial transactions in the UK, or wish to benefit from higher interest rates, then an offshore bank account can be an asset.
An offshore bank is one situated outside the country where the account holder lives. The term ‘offshore’ refers to jurisdictions like the Channel Islands since they are ‘offshore’ from Britain, but it can also refer to a landlocked country like Luxembourg or Switzerland.
Offshore banks have various attractions such as higher interest rates, tax planning, additional services not supplied by domestic banks, banking confidentiality (though this is slowly being eroded as a result of international legislation), protection against local political or economic instability and accounts in both Sterling and the Euro.
It is relatively easy to open an offshore bank account and you do not have to visit the jurisdiction to do so. Telephone banking and internet access will make your account simple to manage wherever you live. You will have to provide your local tax identification number to prove that you are in the tax system of the country where you are living, as well as proof of your identity and address like your passport and utility bills, and information about where your money has come from.
All this is to prevent identify fraud, tax evasion and money laundering. It also helps the bank to build up a profile of your banking activities in order to monitor the account and to see if there are any unusual transactions which may alert them to the fact that your identity has been stolen.
Until 1st July 2005 interest from bank accounts in Jersey, Guernsey and the Isle of Man was paid gross and it was up to the individual to declare these earnings to his country of tax residence. Tax residents of Spain, the UK and most European countries are legally obliged to include these earnings on their tax returns.
Under the terms of the EU Savings Tax Directive, banks in the British offshore islands are now deducting a withholding tax from the interest earnings of EU residents. The tax is currently 15%, but it will increase to 20% next year and to 35% in 2011. You can instead authorise your bank to automatically exchange information with your local tax authority each year, in which case your interest will be paid gross. To set this up you will need to provide your tax registration number.
It is a common misconception that paying the withholding tax exempts you from declaring the interest earnings on your local tax return. This is not the case – it is fundamental that all your worldwide interest earnings are fully declared for tax in your country of residence, even if from an offshore bank applying the withholding tax. You should be paying the full amount of tax due on these earnings as per the regulations and rates of your country of residence. Failure to declare the interest earnings is tax evasion and therefore a crime.
As we move closer to the days when automatic exchange of information will apply across the board, replacing the withholding tax, it is important to ensure that your banking and tax planning conforms with the laws in your country of residence.
To increase security on international bank transactions, standardise the identification of bank accounts, speed up the process of international bank transfers, avoid manual intervention and extra costs, the EU introduced IBANs on 1st January 2007, although many European banks have been using them for some time.
The IBAN uniquely identifies a bank account wherever it is located. It is made up of around thirty alphanumeric numbers consisting of the country code, control digits, bank code, branch code and account number. When making transfers you will also need to also include the Bank Identification Code (BIC), alternatively known as the SWIFT code, which was a bank’s identification number used before the introduction of IBANs.
IBAN numbers are for use mainly with Euro transfers (where their use helps avoid delays and additional charges being applied) but banks in offshore jurisdictions, even though not in the EU, are now also using IBANs. At present, IBANs do not have to be provided for cross-border Sterling transactions although some of the major UK banks have issued IBANs to Sterling accounts.
Related Posts
- Offshore Banking Makes Sense for Expatriates
- Spanish Banking Services for Foreign Residents
- Taxman Closes in On Offshore Property Owners
