It is true that offshore banking has sometimes been associated with tax avoidance schemes which give it a bad name. However, offshore banking for expats can have many benefits, even if there are no tax savings.
Expats by definition work away from their home country and will therefore tend to earn in one currency whilst having liabilities to cover at home. Most plan to return home or to move to another country to work or retire. Offshore accounts are useful for those who regularly need to transfer money home or to other parts of the world and for those who have concerns about the security of their money – either where they are resident and earning or in their home country. There are also potential tax advantages, but this is not the primary advantage.
There can be risks when working and banking in some countries. The country can be stable for many years until a problem arises and it is best to be ready before it happens.
In many Asian countries there have been runs on the currency where drops in economic confidence lead to an outflow of capital, which in turn leads to pressure on the currency, resulting in further outflows of capital. This can lead to a major reduction in the value of your savings and highlights the need to transfer funds to a third country to ensure that you do not lose a significant proportion of your savings in the event of such a crisis.
In the Gulf states currencies are generally linked to the US dollar and backed by well-capitalised national banks. However, the banking relationship is often tied to your employment and the banks are able to freeze the money in your account if you have an outstanding loan or credit card balance if you lose your job. Another risk is that money in the region may be subject to Sharia law: for example different inheritance rules may apply and the money may go to your nearest male relative and not to your spouse or children.
All of this makes it worth holding funds outside your country of residence, and using one of the offshore banking locations gives added advantages.
The main benefits of banking offshore are:
- Security – The safest locations are the highly regulated countries of the Channel Islands, the Isle of Man and Switzerland in Europe, and Hong Kong and Singapore in Asia. This will protect you from the major risks outlined above. There are less-regulated locations, such as some of those in the Caribbean. You should check what regulatory regime is in place, what protection is offered, and how they are regulated. In Guernsey and the Isle of Man, for instance, there are Deposit Compensation schemes which provide protection for deposits of up to £50,000.
- Exchange risk – Offshore banking allows you to have multiple currency accounts and enables you to hold your funds in one currency until the rates are favourable to change to your domestic currency. With the risks of holding funds in weaker currencies it is worth considering the benefits of holding them in one of the ‘reserve’ currencies, US Dollars, Sterling or the Euro. Offshore accounts will generally offer a good exchange rate and allow you to move between accounts in different currencies without charge.
- Investment – Offshore banks will often provide you with investment options that are appropriate to people living an international lifestyle. Offshore banks will also generally offer tools and advice to help you to build your investment portfolio.
- Tax – Your liability for tax is primarily determined by your tax residence, but in some cases you will be subject to tax on your worldwide income only if it is remitted to the country where you are currently living. It can also be an advantage when it comes to estate planning as assets that are held offshore might not be subject to inheritance tax depending on your nationality, tax status and where you are resident.
- Convenience – Expats who move from one country to another can benefit from leaving their funds and investments in one secure location. Accounts are easy to open and this can generally be done online. You will need to fulfil their ‘know your client’ due diligence requirements to prove your ID and address, but should not need to visit the bank in person. The service levels mean that you will have easy access to the funds wherever you are through online and telephone banking.