Off Shore Accounts

isasmurf

MSJW is correct. Tax is payable on interest paid regardless of the location of the account.

From http://www.inlandrevenue.gov.uk/esd-guidance/faqs.htm#24
2.4 I have a bank account overseas. Should I tell the Inland Revenue about interest I receive?
This income is taxable in the UK, provided you are resident here for tax purposes and are domiciled here. See booklet IR20 for more information on how to find out your residence and domicile status and the implications for foreign income. If you have not declared such interest then you should contact your tax office.

And if you don't report your income from offshore savings to the taxman and its in an EU country they will come chasing you when the EU Savings Directive comes into force next year. This directive means that all EU states (and dependant territories inlcuding IOM and Guersney) plus Switzerland will agree to swap information on individuals savings accounts between each other. Austria, Luxemborg, Belgium and I think Switzerland have opted for a limited time not to swap information but to charge a withholding tax.

Big Brother, or in this case the taxman, is watching!

DiggingOut

Precisely. As has been stated, the exception would be if your domicile is non-UK. Then, the income would be taxable only when it is brought into the UK.

System

The Portland B S Gurnsey offer a good rate and are protected as in the UK, you are suposed to tell the tax man about the interest ????????

MJSW

Thanks Paul! As regards your question about your brother-in-law, there are several reasons why he may be paying no UK Income tax:

1) How much times does he spend out of the UK? If he is abroad enough, he could become non-resident.

2) There is a generous relief available called the seafarers earnings deduction, which provides a deduction from earnings even if quite a large part of the year (up to half) is spent in the UK. See http://www.inlandrevenue.gov.uk/pdfs/2003_04/self_employment/ir205.pdf for more details. You need to be quite careful with the dates you are at home and abroad to qualify for full relief.

3) Is he paying tax in another country? If so, he may be paying no UK tax due to double tax relief.

(However, if he is employed by the Crown, then the reliefs in 1 and 2 would not apply.)

Are the rules different for overseas earned income than overseas unearned income?

Not really. They work on essential the same principle, ie if you are resident and domicilied, then you pay tax on your worldwide earnings. If you are non-resident then you pay tax on your earnings in the UK only. There are some added complications with employment income though, because the tax treatment can also effected by the residence status of the employer, particularly for non-domiciled employees. Helpsheet SA109 provides a helpful summary of what is taxble, what is only taxable on the remittance basis, and what isn't taxable for each source of income and combination of resident, ordinarily resident and domiciled.

Also, he wants to open a deposit account in the UK. Will he still have a personal UK allowance that can be used against interest earned on UK-based deposit accounts?

Yes. Personal allowances are available to many different people, even non-residents, and so I'm certain your brother would get one. Those eligible include people who are tax resident in the UK, citizens of an EEA country (including the UK), citizens of Commenwealth coutries, residents of the Isle of Man and Channel Islands, and people who are or have previously been employed by the Crown.

MJSW

The Portland B S Gurnsey offer a good rate and are protected as in the UK, you are suposed to tell the tax man about the interest?

Firstly, yes you do need to tell the taxman!

Secondly, which account did you have in mind? None of the rates look particularly good to me.

-Offshore Access access pays 3.6% (poor)
-International Reserve pays 4.85% (not bad, but needs 15 days notice and only allows 4 withdrawals per year, you can get better rates with no notice and unlimited withdrawals in the UK)
-Offshore 60 pays 4.4% (Needs 60 days notice. Again, you can get higher rates and instant access in the UK).
-One year bond 5.25% (This is OK, but you can get up to 5.61% from Birmingham Midshires).

As has been stated above, there is no real tax advantage to a UK resident and domiciled taxpayer from an offshore account. The total amount of tax payable on the same amount of interest will be exactly the same whether the account is in the UK or offshore. The only real advantage offered by an offshore account to a UK domiciled and resident taxpayer is that the tax is paid slightly later, providing a small cashflow benefit. With a UK account tax is deducted at source when the interest is credited to the account. With an offshore account, interest is paid gross and then the tax needs to be paid over to the Inland Revenue together with the other tax liabilities (generally by 31 Jan following the end of the tax year, but if you have to make payments on account you may actually end up paying half of the tax on the 31 Jan before the end of the tax year, and the other half on the 31 July after the end of the tax year.).

cheerfulcat

Hi, MJSW

The whole point about an offshore account is that the interest is not credited until the depositor decides to take it, preferably in a year when he or she is in a lower tax band. The link to the IR site in Paul Varjak's post confirms this; I quote,

" Interest is taxable by reference to the date on which it is credited to your account, regardless of the period over which the interest accrued "

This is true even if you are UK resident and domiciled.

The advantage is that the interest is calculated gross, year by year; your compounded return is thus greater; that's why the rates can be lower than onshore. For someone paying 40% tax, even the best onshore rate -6% currently - is only 3.6% after tax. That makes 4.4% look like a pretty good return, especially as it rolls over tax free, instead of having 40% of it taken away annually. Also, of course , the hope is that when the money is repatriated ( say at retirement ) the investor is actually only paying tax at 20%.

Cheerfulcat

isasmurf

Huh? Sorry for asking the silly question of the day but how can interest be compounded if you haven't been paid it? Do offshore accounts work differently from UK accounts. In the UK interest is charged on the balance of the account daily and added on a monthly/annual basis. Only when the interest is paid does that in turn start earning interest.
Do offshore accounts work out interest on theoretical interest that you will get paid at some time in the future.

I feel I'm missing something obvious here???

cheerfulcat

Hi, Smurf,

Yes, offshore accounts are seemingly structured differently. I assume that the interest is back-calculated when you take the money out. Here's some general info from a law firm which may be of use -

http://www.dickinson-dees.co.uk/publications/FPGFactsheets/OffshoreInvestments.asp

Cheerfulcat

ps I am not advocating use of these accounts and investments, just answering the original question.

MJSW

The whole point about an offshore account is that the interest is not credited until the depositor decides to take it, preferably  in a year when he or she is in a lower tax band.

With respect that is not 'the whole point' of an offshore account. Usually, interest on offshore accounts is credited on a regular basis. The ability to defer interest is NOT a typical feature of an offshore account - it is a feature of that particular Britannia account only (although there may of course be other accounts both offshore and onshore with the same feature, but it is relatively unusual). For example, all of the other accounts Britannia International offer pay regular interest and are taxable on a regular basis, yet they are all offshore.

As I explained before, the deferred interest feature is a feature of that particular account, and is completely unconnected to the account being offshore. The tax treatment of a UK account with the same feature would be completely indentical. For example Co-op Bank in the UK offer fixed rate bonds which pay all of the interest at the end of the term, thus deferring the tax liability until the bond matures.

You appear to be confusing the features of one particular account (which just happens to be offshore), and assuming that it is something which applies to offshore accounts in general. It would be far more accurate to say "the whole point of that particular Britannia account is ...", rather than "the whole point of an offshore account is....". The offshore status of that account is entirely irrelevent to deciding in which year the interest is taxed.

" Interest is taxable by reference to the date on which it is credited to your account, regardless of the period over which the interest accrued "

I agree entirely, but again the fact the account is offshore is irrelevent. The same rule applies whether the account is held in Jersey, Guernsey, London, Timbuktu, Barnsley, Paris, New York or Grimsby!

The advantage is that the interest is calculated gross, year by year; your compounded return is thus greater;

Sorry, but again that is completely incorrect and highly misleading. With that Briannia account the interest doesn't compound gross, it doesn't even compound net, IT DOESN'T COMPOUND AT ALL. If you put in £10,000, you would accrue £485 in year 1 , £485 in year 2 and £485 in year 3. If you look at the small print on the interest rate page, you will see hidden in the small print that the AER over 2 years is less than the flat interest rate of 4.85% (ie it is 4.74% over 2 years). This is because there is no compounding of interest. In fact the longer you hold this account, the worse the AER will get, because the interest is always accrued on the original balance. There is no compounding because interest is never added to the account. If you hold the account for 5 years, the AER drops to only 4.44%. If you hold it 10 years, it drops to 4.03%.

For someone paying 40% tax, even the best onshore rate -6% currently - is only 3.6% after tax. That makes 4.4% look like a pretty good return, especially as it rolls over tax free,

If by the 4.4% you mean the Portman 60 day account, then it doesn't roll over tax-free! Interest on all the Portman accounts is paid at least annually. You would get a 40% tax bill every year just as you would with a UK account. So you would only get 2.64% after tax.

As far as the Britannia account is concerned, I agree that this could offer useful tax planning advantages if you are expecting to drop to a lower tax band in a few years time. But as above, you need to also bear in mind that you will get no compouding whilst you hold the account (which has to be for at least 2 years), and other similar alternatives may offer better rates (such as Co-op's fixed rate bonds, which were offering 5.5%+ last time they were on offer.)

cheerfulcat

OK, I give up! Only trying to help.

( Aber sie dreht sich doch. )

:-)

Cheerfulcat