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Tax haven myths busted: legitimate reasons to bank offshore

Offshore bank account holders have been criticised of late for choosing to deposit their money in so-called tax havens. However, there are many legitimate reasons to bank offshore and here we explore

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One of the biggest surprises for many of the thousands of Kaupthing, Singer & Friedlander Isle of Man depositors who lost access to their savings when the bank collapsed last October has been the lack of sympathy they have received.

Many of these KS&F IoM bank customers were ex-pat Brits of relatively modest means who had been unable to keep existing or obtain new onshore UK bank accounts after new anti-terrorism regulations were introduced following the 9/11 terrorist attacks.

Yet after their savings were impounded, they suddenly found themselves dismissed in the press and by some politicians as “tax evaders” – and as such, or so some felt, were seen as largely deserving of their fate.

Even UK Chancellor Alistair Darling at one point in November referred to the IoM as “a tax haven sitting in the middle of the Irish Sea”. 

Since last month’s meeting of the G20 countries, however, and the related publication by the Organisation for Economic Cooperation and Development of a “white” list of financial centres that included the Isle of Man, there has been a growing recognition of the various legitimate reasons why some people might wish to keep at least some of their assets offshore.

Avoidance versus evasion

While legal tax avoidance (as opposed to illegal tax evasion) does figure among the reasons many people like to bank offshore, it is not the only one, according to such experts as AES International director Sam Instone. And for some, it is not even the main reason, he says. For example, an oil executive in a country known for kidnappings might prefer to keep only a small amount of money in his or her local bank, he notes.

Below, what experts have told International Adviser are among the reasons people may wish to keep their money offshore – followed by a list of reasons for keeping it closer to home. (As previously reported by IA, many ex-patriate Britons say they find it impossible to open new onshore UK bank accounts, a situation the British banking industry has said it is seeking to improve.)

Reasons for opening an offshore bank account:

• Offshore banks do not automatically deduct tax from interest payments at source, as occurs in UK onshore accounts. This enables interest income to “roll up” and accumulate exponentially, thus increasing one’s annual return
• Offshore banks may offer better rates; there also may be tax planning and inheritance tax advantages, depending on the depositor’s country of domicile
• Unlike their UK high street counterparts, most offshore banks offer “multi-currency functionality”, that is, the ability to transact business such as making deposits and paying bills in different currencies
• Assets may be moved about more freely
• Offshore accounts offer wealthy individuals a way of legally hiding the extent of their wealth from people and organisations other than government authorities who would have a legitimate reason (and presumably would be kept informed) of the amount. In addition to seeking to avoid becoming a target for extortion and kidnapping campaigns in countries where such occurrences are common (and bank security systems are lax), such individuals might also seek to avoid the attention of the press, or catching the eye of less-rich relatives or others who might come looking for hand-outs 
• For expats living in developing countries with dubious financial systems and/or political instability, well-regulated offshore financial centres like the Channel Islands or Isle of Man offer a sense of security

Reasons for opening (or keeping open) a UK onshore account, if non-resident:
• Onshore UK accounts enjoy the protection of the UK’s Financial Services Compensation Scheme, which covers deposits of individuals up to £50,000; offshore jurisdictions do not always offer comparable coverage (though some do) and others do not have any depositors’ compensation programmes at all
• Onshore banks may offer better rates than the offshore banks are offering
• Having an onshore bank account can be useful for handling UK financial transactions, such as receiving payments from UK individuals and companies and making payments

Can you think of other legitimate reasons for keeping an offshore bank account, or keeping one onshore? Please tell us: email iam@lastwordmedia.com.

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