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Tax tips for global citizens

Thursday January 25, 2007

Iain Yule

One of the main problems about living away from your home country is the tangle your finances can get in. You may have to run bank accounts both back in your home country, and in your new location. And the tax authorities of both these countries may be chasing you for their fiscal cut of your income.

So, what?s the matter with that? Well, having these ?domestic? bank accounts means that your savings are open to automatic deduction of income tax on interest earned. And this is despite the fact that if you have become a non-resident of your former home country you are usually not liable to pay tax on your income while abroad.

The answer is to make sure you are officially recognised as non-resident in your former home country, and to place your money outside the reach of the taxman.

With most countries? tax systems you are usually reckoned to become non-resident for tax purposes after being abroad for a complete tax year, and only making relatively short visits home. If you are sent abroad by your employer then non-resident status may provisionally be granted as soon as you travel. Under the UK system, to remain non-resident Britons abroad need to make sure visits home do not exceed a total of 183 days in any one tax year, nor an average of 90 days per tax year for the whole of their time abroad.

Other countries? tax systems differ and you should check your status with your tax office back home. Americans abroad, for instance, are pursued for tax by the Internal Revenue Service no matter where the income arises. But most fiscal systems allow the non-resident to escape taxation back home. There?s a briefing on some of the main residency rules below.

Once you have established yourself as non-resident it is sensible to move your money to a place where it will not face automatic deduction of income tax on any interest you earn (as it would do if you sent it back home).

And this is where many expatriates turn to offshore banking. This may conjure up ideas of tax evasion or money laundering, but it is a sensible option for the expatriate to consider so that he or she does not pay unnecessary tax. The Briton who works in Italy, for instance, will be taxed in Italy, so why should he or she be taxed again for sending money back to a bank account in the UK?

Offshore really just means ?outside the scope of a particular country?s tax system?. Britons placing their money outside the UK tax system tend to use the offshore islands of Jersey, Guernsey and the Isle of Man. These islands have different ways of raising tax than the UK, and they aim to boost their economies by attracting money to the banks and investment funds based there.

Other offshore finance centres can be found in many of the islands of the Caribbean such as Cayman, the Bahamas and the Virgin Islands. Mid-Atlantic there?s another offshore location in the shape of Bermuda.

Many are outposts of the British Commonwealth that have been encouraged to be self-sufficient. And they make themselves attractive by offering low- or no-tax regimes where offshore banks can operate.

It is perfectly legal to open a bank account offshore, as long as you are not using it to conceal money from the taxman, the police or your creditors. And going offshore should be as safe as depositing your money in a bank in the UK.

The Channel Islands and the Isle of Man are seen as particularly safe, as they are close to the British way of life, have been virtually scandal-free, are stocked with the big, familiar names in financial services ? and they offer tax benefits similar to the more out-of-the-way havens. Financial regulation is similar to the UK?s system, and they will only admit top-notch banks. The Isle of Man even has a scheme to compensate depositors in the unlikely event of a bank going bust.

Offshore finance centres are strictly scrutinised by international bodies to make sure they are not providing facilities for money launderers or terrorist funding. For this reason you may find that you have to jump through a few more regulatory hoops to open an offshore bank account than you would have to for an ordinary account. But this is only to establish that your money is ?clean?.

Most of the offshore banks are offshoots of the familiar British, European and American high street names, so you will not be dealing with anything unfamiliar. Many offer cheque accounts, savings accounts, debit cards, credit cards, standing orders, direct debits, money transfers, mortgages and so on, just like ?domestic? banks.

A popular facility is one that allows you to save in currencies other than your ?home? currency.
If your move abroad is long-term or permanent it makes sense to have your savings build up in the currency you are going to spend. So, those based in Europe may well consider switching a proportion of their savings to an offshore euro account. Those moving to the US or other location where the dollar is the primary currency may want to switch to a dollar account.

With many banks you can manage your account via the internet. With secure messaging, you can download account information, change account details, send information, and instruct financial transactions.

Most of the high-street banks and building societies have offshore operations, so you could ask for information at your local branch (though it may only be the manager who knows anything about it). Or go to your bank?s website where you should be able to find directions to its offshore offshoot?s contact details.

Residency Rules


  • If you are leaving the UK to work abroad you are provisionally considered non-resident from the day you leave. But this beneficial status can only be confirmed by you staying out of the country ? except for relatively brief visits home ? for a complete tax year, which runs from April 6 until April 5 the next.
  • You are considered to be non-resident if you leave the UK to live permanently abroad for a period of at least 36 months.
  • To retain non-residency, visits home must not exceed a total of 183 days in any one tax year, nor an average of 90 days per tax year for the whole of your time abroad.
  • If you are unsure of your status you should consult a specialist tax adviser. If you cannot prove you are non-resident, the UK taxman will want his cut of your money.
  • Similar rules may apply to other nationalities abroad, but check with your own tax service.
  • Americans abroad are taxed on their worldwide income.

Resources

  • Britons abroad can check up on their residency and tax position at the website of HM Revenue & Customs? Centre for Non-Residents at www.hmrc.gov.uk/cnr.
  • At www.expatnetwork.com, you can click on Expat Money and then on Expat Network Awards and see which offshore banks have been offering the best deals consistently over the long term, and on Offshore Bank Savings Rates for the top rates of interest currently being offered.

Iain Yule was the founding editor of Investment International magazine and is a consultant to the Expat Network.


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