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Sunday October 8, 2006

Moira O?Neill

There is no reason to feel mystified by offshore banking. Yes, it is a service frequented by the mega-wealthy, who like the tax breaks and privacy surrounding their financial affairs. But it can also be useful to people with more modest means.

A large number of banks, including many UK high street names, offer offshore banking services to anyone with 5,000 at his or her disposal, which is within the reach of most working expatriates, even those on smaller salaries. So you don?t have to be a millionaire to bank offshore.

There are many reasons to favour offshore banking. Tax benefits come high on the list. Tax breaks are available offshore that can in effect make your savings earn more interest. When you bank offshore, interest is paid gross rather than net of tax.

For expatriates who often move from one country to another, banking offshore ensures continuity of their financial affairs, no matter how often they have to relocate. Many expatriates keep the bulk of their savings offshore while banking small amounts locally for management of daily expenses.

However, for people based in volatile parts of the world the prospect of holding money in a local bank may not be appealing. If the area were to be evacuated suddenly, money could be left vulnerable.

So what exactly is offshore banking? ?Offshore? has a special meaning in the financial world. It was originally a geographical term: people moved their residence or business affairs from their homeland to a nearby tax-efficient base, usually on an island. The term is now applied to any centre where international business can be done in a favourable tax climate. This may be an island (Isle of Man), a landlocked country (Luxembourg) or a state within a state (Dublin?s International Financial Services Centre).

All offshore centres have low tax rates for residents, including banks and financial institutions, and typically no tax for non-resident savers and investors.

However, since the introduction of the European savings tax directive last year, savers resident in the EU with accounts in Guernsey, Jersey and the Isle of Man no longer automatically see their interest paid before tax.

Offshore banks offer a broad range of account types, including no-notice accounts, monthly income accounts, notice accounts and fixed-rate accounts. Some offer internet and telephone banking.

Offshore banks cater for the needs of the ?mass affluent? market, typically those with more 25,000 to invest, with personalised financial planning services. These may include investment management, private client portfolio services, tax planning assistance and use of offshore trusts. In selecting an offshore bank, you will probably feel most comfortable with a name you trust. British expatriates should first approach the UK bank that they use or the one with which they are most familiar and ask if it has an offshore subsidiary.

If you know the account type that you need, it might be worth shopping around to find the bank that offers the best rate.

Ask about customer services, making sure that the bank to which you entrust your money is easily accessible. Not all offshore banks offer 24-hour customer services. If you live in a different time zone, this could cause problems.

If you are concerned that your money might disappear if entrusted to an offshore bank, you are perhaps being overcautious. But it does make sense to check what protection there is for your finances. What would happen if the organisation went bust, for example?

Offshore banks, even those that are subsidiaries of authorised banks in Britain, are not covered by the UK financial services compensation scheme ? which only covers British-authorised banks and their subsidiaries in the European Economic Area (EEA). Jersey, Guernsey and the Isle of Man are not in the EEA.

As a rule, any offshore subsidiary of a financial institution that has a reputation to protect among savers and investors in its home country is likely to be a safe bet.

Unfortunately, if you are thinking of applying for an offshore bank account, be warned: the ?know your customer? requirements imposed on all banks as part of the fight against money-laundering activities have made it a time-consuming, bureaucratic business. The application form may run to several pages, and once you have completed it, you will need to prove that you are who you say you are.

The Organisation for Economic Co-operation and Development?s financial action task force (www.oecd.org) publishes a black list of non-cooperative financial centres that don?t come up to best practice standards.

Many offshore centres (for example, Jersey, Guernsey and the Isle of Man) have turned the pressure to conform with international best practice into a selling point, marketing themselves as the legitimate end of the offshore world. Others, such as Switzerland, continue to protect their principles of banking secrecy.

Contacts

For the best current offshore banking rates, including easy-access, notice, monthly interest and fixed-rate accounts, visit: www.moneyfacts.co.uk. Also, www.interest-rates.org.uk monitors the interest rates of 2,000 offshore accounts each day. Just tell it what you need and it will give you a list of the best.

If you don?t feel confident enough to choose offshore products and services on your own, you should seek the services of an independent financial adviser. Be prepared, though, to pay a fee for this advice, which may be levied by commission on the products recommended.

To find a UK-based independent financial adviser that specialises in expatriate investment, visit: www.moneyobserver.com and use the ?Find an IFA? service.

www.lowtax.net is an extensive website, covering all the offshore centres with background on various jurisdictions plus regular updates.

For background reading on tax issues, plus a range of leaflets and guidance notes, UK expatriates should visit www.hmrc.gov.uk

Other useful websites include: www.worldoffshorebanks.com, a global directory of offshore banks, www.offshoreoutlook.com, a portal linking to scores of offshore bank and investment sites worldwide, and www.squirrelyournutsoffshore.com, a site dedicated to providing investment opportunities for expatriates.

To find out more about the regulation of offshore centres, visit: Isle of Man Financial Supervision Commission: www.gov.im/fsc, Guernsey Financial Services Commission: www.gfsc.gg, Jersey Financial Services Commission: www.jerseyfsc.org, Commission de Surveillance du Secteur Financier (Luxembourg?s financial regulator): www.cssf.lu, International Financial Services Centre, Dublin: www.ifsconline.ie


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