Are you thinking about putting your savings into an offshore account?
Maybe you live or are just about to move away from your home country, maybe you've heard that
you can get higher interest rates offshore, maybe you think that you can avoid (evade) paying taxes on the
interest, or maybe you want to "hide" some of your funds.
Here's a few things to consider about banking in the British offshore "tax havens" of
the Channel Islands (Guernsey, Jersey) or the Isle of Man:
It is important to understand that Guernsey, Jersey, and the Isle of Man are not part of
the United Kingdom. They are Crown
and each has their own independent government.
Nor are they part of the European Union (EU)
or European Economic Area (EEA), and so are not subject to UK, EU, or EEA banking regulations or
supervision; each jurisdiction regulates and supervises itself.
This means that if your bank gets into difficulties you will be reliant on only the
local jurisdiction for help, and not any other country. The UK has explicit stated that they will not
assist you or them.
"...the UK Government cannot provide cover for deposits held
by British citizens in jurisdictions outside the direct control of the United Kingdom." UK Parliament Treasury Select Committee Report, s. 87-88, 31-Mar-09
Higher Interest Rates Offshore
Are you sure? It's true that you can sometimes get better interest rates offshore
but equally true that the best rates are often to be found onshore, so don't assume that just because it's
offshore you'll necessarily get the best rates. Look around and do your research.
However, don't be seduced by high interest rates alone. An extra % or so won't make up
for your potential loses if the bank goes under, although the level of interest offered is not necessarily an
indication of risk in itself.
The offshore Icelandic banks were offering lower interest rates than the best
onshore rates in the months before they went under, and the UK high street banks, such as RBS and HBOS, were
offering quite mundane rates - and both of those would have collapsed had the UK government not bailed them
No Taxes Offshore
None of the Crown Dependencies levy taxes on the interest you receive directly
for themselves, however you will be liable for paying taxes on that interest to your country of residence, and all
three so called "tax havens" have entered or are entering into international agreements to make sure that you do.
Although not members of the EU themselves, all three jurisdictions have signed up to the
European Union Savings Directive (EUSD).
This means that if you are resident in an European Union country (including the
UK) you have the choice of:
- having 20% of your interest taken directly from your account (EUSD Retention Tax ), rising to 35% from 1st July
- receiving your interest gross, in which case your identity details and the
amount of interest you've received will be reported to the tax authority of your country of residence.
From 1st July
2011 your identity details and interest will be reported to your country of residence, irrespective of whether
you opt for the retention tax or gross interest.
All of the Crown Dependencies have also entered into additional Tax Information Exchange Agreements
(TIEAs) with other countries (see left). These allow the tax authorities of those countries to find about the accounts and investments that
their residents have in the Crown Dependencies, local banking privacy notwithstanding.
With the current
global mood against tax havens and for banking transparency, the number and scope of TIEAs and other forced disclosure agreements is likely to increase.
Countries the Crown Dependencies have signed Tax Information Exchange Agreements
Depositor Protection - are offshore accounts SAFE?
Interest rates and taxes aside, your overriding consideration will be the safety of your deposit. No amount of interest or tax advantages
(indeed, if there are any at all) will make up for losing some, or all, of your savings, or for
the shock when you go to your bank's website only to see a notice that it is in Administration or Liquidation
or for the stress and worry while you wait months
– if not years
– to find out how much the Administrators or Liquidators will be able to recover for you.
Depositor Compensation Schemes
When people talk of depositor protection they are usually referring to a depositor compensation scheme (DCS)
and you should certainly examine
in detail the scheme in effect for the
jurisdiction you are thinking on placing your savings into to decide if it will truly protect your savings, or is just a token scheme in place so that the
jurisdiction can "tick the box" and say they've got one.
It's important to note that deposits in the Crown Dependencies are not covered by the UK Financial
Services Compensation Scheme (FSCS), even if the bank is an offshore subsidiary of a British bank, nor included in the European Economic
Area "passport" scheme.
You should also note that the amount covered depositor compensation schemes is per person, not for each account with a bank, and the cover is per licensed bank, not per banking "brand".
Most banks in the Crown Dependencies promote a parental "guarantee" in their literature. Indeed, the Guernsey Financial Services Commission
(GFSC) recommends the wording
the banks it regulates should use.
Banks in the Isle of Man and Jersey offer similar "guarantees".
A report commissioned by the GFSC expressed concern that their recommended wording did not properly inform savers
of the scope and risks of the parental guarantees.
As one press report noted for all offshore banks,
"...savers can no longer rely on the guarantees offered by financial groups to their offshore
subsidiaries. If the parent group fails then the guarantee is virtually worthless." Telegraph 9-Apr-09
Parental "guarantees" are only as good as the parent, so you should check the financial strength of the parent group as well as that of the subsidiary. Indeed, both
Kaupthing Singer & Friedlander Isle of Man (in Liquidation) and Landsbanki Guernsey (in Administration) had strong balance sheets themselves and were dragged down by the failures of their parents. Neither is expected to be able to honour their "guarantees".
Recent events have demonstrated that the willingness of a government to act to protect
depositors banking in its jurisdiction is far more important than any other factor. For example:
- The UK government stepped in to guarantee 100% of
retail customer deposits in Kaupthing Singer & Friedlander UK ("Kaupthing Edge"), Heritable, and Icesave UK, even though the UK DCS only covers £50,000 per depositor.
- The Icelandic government acted to guarantee 100% of local depositors' funds, even though the Icelandic
DCS only covers 20,887 Euros per depositor.
- The UK effectively guaranteed all deposits in RBS, HBOS, Lloyds TSB, Bradford & Bingley, and Northern Rock,
by either government bail out or nationalisation.
As for the Crown Dependencies, in the recent banking crises Guernsey has been unwilling to help savers in its
jurisdiction, the Isle of Man has been willing but only to limited degree, and Jersey has stated that they will
only help resident savers.
As well as the willingness of governments to act to protect your savings, you need to also consider their
ability to do so. All of the Crown Dependencies are geographically tiny jurisdictions with
populations the size of a small town, a very limited tax base, and highly dependent on their status as
"offshore financial centres".