Two common misconceptions about offshore banking are that it is illegal and that it is only for the super-wealthy.
Well, it’s not quite so. As an expat you can use offshore banking legally and to your advantage. This guide will show you how.
Firstly, banking offshore in a nation other than the one in which you currently live is absolutely legal and legitimate. Secondly, there are banks out there that can start an offshore account for as little as $300.
An offshore bank account is often used by those who have little faith in their local banking industry or economy, those who live in a less politically stable nation, those who can legitimately avoid taxation in their new nation by not remitting funds to it, and expats who want one centralised bank account source for their international monetary needs.
For all such individuals banking offshore is not only legal, it’s sensible too. As long as those individuals declare all assets offshore to any tax authority where they have an obligation to declare them, and they pay any taxes due, they are acting legally.
Offshore banking choices for expats
For an expat there are definitely more advantages than disadvantages to using offshore banking. This is why:
At the bottom line expatriates have four basic banking options:
- they can operate their main banking activity through their old account back in their country of domicile;
- they can open a new account locally and use this for all their transactional activity;
- they can choose to bank offshore;
- or, they can combine the above three approaches.
The way that works best for most expatriates is to combine the use of a home country bank account for any payments there, a new local account for day-to-day costs, and an offshore bank account for the management of the majority of their money.
Retaining a bank account in a country of domicile makes significant and long-term sense for many expatriates. Unless you’re attempting to change your country of domicile and sever all ties with your home country forever, retaining a banking presence there will mean that if ever you want to repatriate, the path will be smoother for you.
You may well find that you will not necessarily have to go through such rigorous client due diligence checks upon your return if you want to rent a property, raise a mortgage or even apply for a credit card for example.
It does not make sense to earn your money abroad and then transfer it all back to your country of domicile, incurring currency exchange costs and risks every time.
Nor does it make sense to manage international finances through a local account or to necessarily make your financial affairs known to your home country authorities when you legally have no obligation to do so.
Opening a local bank account in your new nation of residence may also make a lot of sense and even be a requirement.
For example, your employer may demand you have such an account into which your salary can be paid each month. You may also need such an account to have utilities connected to your new property, to get a mobile phone, rent a house, raise a mortgage or purchase a car.
However, it is not usually in your best interests to bring all of your capital and wealth onshore to your new nation of residence and bank it locally.
For a start, you don’t have to, and if you do then your capital is immediately in the tax system of the country in question and it is very difficult, if not impossible, to change your mind or reverse this situation in the future.
For the vast majority of expatriates, there are severe taxation disadvantages to bringing all of your money onshore into your new nation of residence, so you might want to avoid such a situation.
That’s where an offshore bank account can prove helpful.
The main thing to remember is that offshore banking isn’t necessarily a perfect solution for every expat. It’s important to know what advantages and disadvantages offshore banking has and how it fits in your personal situation.
To help you decide whether an offshore bank account is right for you, here are the most prominent advantages and disadvantages of offshore banking.
The advantages of offshore banking
You can bank in different currencies and even multi-currencies – which is of advantage to expats with financial commitments in more than one nation or currency for example.
Safer for your money
If the nation in which you live has a less than favourable economic climate, by keeping your wealth in an offshore bank account you can avoid the risks in your new nation such as high inflation, currency devaluation or even a coup or war.
Great for tax optimisation
For those expats living in a nation where you only pay tax on the money you remit into that country, there is an obvious tax benefit to keeping your money in an offshore bank account.
Offshore or international accounts are usually designed to offer customers maximum flexibility in terms of account usage. Expats can benefit from this no matter where they are in the world as it can mean they can access their funds from ATMs or online or over the phone at any time of the day or night, no matter what the time zone.
Any interest earned is usually paid free from the deduction of taxation. For those who don’t pay tax on foreign-sourced income this means they can enjoy greater returns immediately, without having to apply for a rebate.
You can potentially enjoy greater account privacy by going offshore. Some jurisdictions – e.g., Switzerland – place great emphasis on maintaining client confidentiality at all times. For anyone wishing to protect their assets from unfair or speculative litigious behaviour, an offshore bank account can be an added deterrent.
An offshore bank account can be a tool in the armoury of those seeking to protect their estate from inheritance taxes in the future. Accounts tied to trusts or companies can sometimes be beneficial for the legitimate avoidance of estate taxes upon death. Note: specialist estate planning advice needs to be sought by anyone seeking to benefit from such an advantage.
Some offshore banks charge less and some pay more interest than onshore banks. This is becoming less and less the case nowadays, but it’s worth looking closely at what’s available when seeking to establish a new offshore bank account.
Use your own bank
Because many of the high street banks have offshore arms, you can potentially remain with your current banking provider when you expatriate – and simply swap to having an international or offshore account.
More investment opportunities
Less government intervention in offshore financial centres can mean that offshore banks are able to offer more interesting investment services and solutions to their clients.
Your dedicated bank manager
You may benefit from having a relationship manager or private bank account manager if you choose a premier or private offshore bank account. Such a service is of benefit to those who desire a more hands-on approach to their account’s management from their bank.
Foreign Exchange services
Some banks can offer you Foreign Exchange services, which could minimise the risks of currency fluctuations. and allow you to wait for a specific rate before making the transfer.
The disadvantages of offshore banking
Might be higher risk
Historically banking offshore is arguably riskier than banking onshore. This is demonstrated when examining the fallout from the Kaupthing Singer and Friedlander collapse on the Isle of Man. Those onshore in the UK who were affected locally by the nationalisation of the bank’s parent company in Iceland received full compensation. Those who had deposits remotely in offshore accounts in the Isle of Man were lucky if they were repaid the £50,000 guaranteed by the depositor protection scheme.
The term ‘offshore’ has become synonymous with illegal and immoral money laundering and tax evasion activity. Therefore conceivably anyone with an offshore bank account could be tarred, by some, with the same brush – even though their offshore banking activity is wholly legitimate.
More due diligence needed
You have to choose your offshore jurisdiction carefully. Whilst you may well be aware of how the banking industry operates in your own home nation and how it is regulated, the rules and regulations abroad differ massively. Also, some offshore havens are less stable than others.
The advantages and disadvantages of offshore banking – Summary
It’s important to look at the terms and conditions of an offshore bank account. Will you be charged higher fees if you fail to maintain a minimum balance, what are the fees and charges for the account and the services you may wish to utilise?
It can be more difficult to resolve any issues that may arise with your account if you hold it offshore. This is because you cannot physically visit your branch and speak to someone in person.
We hope this open and ever-developing list of the advantages and disadvantages of offshore banking will help you to make up your own mind about whether or not an offshore bank account is right for you.
You might find useful:
- The Expat Guide to UK Pensions Abroad – what options you have for your UK pension pot when you retire abroad, tax implications of leaving your pension in the UK or transferring it abroad, how you can reduce your tax liabilities, your UK state pension, etc.
- Expat Financial Questions Answered By A Professional Wealth Manager – FAQs about moving to Europe after Brexit: your tax obligations, currency concerns, pension options, will, estate planning, savings and investments, and, more.
- Offshore Portfolio Bonds Explained – what you need to know about offshore portfolio bonds before considering them as an investment option.
- Banking, Saving, & Investments Abroad – your banking and investment options expand when you become an expat. Read how you can benefit from a broader range of banking & investment opportunities.
- For cross-border financial planning book a free consultation on our Advice page.