Are Offshore Accounts Illegal?
Offshore accounts are accounts that exist outside of your home country, allowing you to save money and make transactions in different currencies. Offshore accounts operate in another jurisdiction, meaning that they are outside the legal power/judgement of your residential country. Usually, having an offshore account means that individuals enjoy tax benefits since the money avoids taxation in their home country, and there may not be similar taxes to pay in the country the account is set up in. Whilst there a lots of reasons a person or organisation may benefit from an offshore account, some countries also have a less regulated and less stringent financial sector than, say, here in the UK. This means they may attract criminal customers who want to bank their money off the radar. It is for this reason that some countries are known as 'high risk' to do business with or accept transactions from.
Using the offshore accounts can open up a channel of professional services abroad, and also encourages global business expansion, trading, investments and growth – all qualities that lead to a strong economy. As above, though, some offshore accounts exist simply to avoid taxation, which can detriment the UK economy. Some popular places to hold offshore accounts for UK residents include the Crown Dependencies of Guernsey, Jersey, and the Isle of Man, Monaco, Switzerland, and Lichtenstein.
Whilst an onshore account is generally considered to be a business/current/savings account within the individual's country of residence, offshore accounts are used for different types of savings accounts and sometimes have links to foreign stock markets.
Depending on the offshore bank, the minimum account opening balance differs. This can start at £10,000 and go all the way up to £100,000 depending on the type of customer they are dealing with, and what the accounts are for.
The links between offshore accounts and 'tax-havens' is because the interest on the accounts is paid without the prior deduction of tax. It is up to the individual to declare income from offshore bank accounts to their relevant tax authorities, and because this is their responsibility, people find ways to avoid it and therefore pay less tax by failing to declare extra income. You may have seen offshore accounts linked with 'tax dodging' in the media.
Two Sides to the Coin
Offshore accounts aren't always used with the aim of avoiding tax, there are legitimate reasons to use them too depending on different circumstances. Plus, the media has a big part to play in the presentation of offshore accounts, in reality the account holders still need to pay tax because you are still liable for tax on the interest you earn in the same way you would be in the UK. So despite the misconceptions, there is nothing illegal about offshore accounts, it's how the owner conducts business that counts.
- If you are a retired British Expatriate and have savings which you would like to invest, then an offshore account is best for you. This is because if you're a resident overseas, most UK banks and buildings won't allow you to open a new savings account whilst the offshore accounts will accept it.
- If you aren't a British Citizen and you've acquired wealth (possibly through inheritance, investment or working in a sterling economy), but you're now a resident outside of the UK, then an offshore bank may support your sterling savings.
- If you are an expatriate worker and move between countries periodically, having an offshore account for your savings in an independent location can be more convenient than constantly having to open and close savings accounts with each change of residence.
- Of course you may be resident in an offshore jurisdiction full time, so a local offshore bank may be conveniently located.
The Positives to Offshore Accounts:
- Ability to bank in foreign countries
- Quite often tends to be a higher interest rate
- You can delay tax payments with them
- Reduces the risks in currently fluctuations
And the Negatives:
- They can be difficult to open
- They can have higher everyday fees (i.e. withdrawal fees)
- Limited levels of protection
- Tax does still needs to be paid, despite what people think