When it pays to stash cash offshore

The financial services watchdog is investigating complaints that the banks mis-sold accounts in tax havens

The City watchdog is looking into claims that high-street banks mis-sold offshore accounts to British residents, amid widespread confusion over the rules on keeping cash outside the UK.

This confusion was compounded last week when the chancellor, Alistair Darling, backtracked on some aspects of his crackdown on so-called nondoms, flooding accountants with calls from confused clients.

The mis-selling case relates to last year’s clampdown by the Revenue on hundreds of thousands of British residents who had kept money in offshore havens such as Jersey, but had failed to pay tax on the money – often unwittingly.

One Bank of Ireland customer, who wished to remain anonymous, was landed with a tax bill for more than £200,000 as a result of the crackdown, and has now lodged a claim with the Financial Ombudsman Service claiming that his bank manager mis-sold the offshore account.

Emma Parker at the ombudsman service said: “We have only dealt with a handful of disputes of this kind over the past five years or so. However, problems such as this did not really occur before the offshore crackdown, so there may be more cases in the pipeline.”

Accountants say that while it is perfectly legal for UK residents to have offshore accounts, the income must be declared and tax paid.

Nondomiciled residents, who were born overseas or to foreign parents, do not pay tax on their overseas income or gains as long as it is not brought into Britain.

From April, however, nondoms who have been resident here for more than seven years will no longer be able to benefit from this perk unless they pay a £30,000 annual fee.

While this will barely dent the fortunes of super-rich nondoms such as Chelsea Football Club’s owner Roman Abramovich, many less wealthy clients will be affected.

Mike Warburton of the accountants Grant Thornton said: “Lots of our clients are contacting us to discuss relocating. They are not super-wealthy people. They are often people who came to university here decades ago and stayed on to build a business.”

Here we answer your questions.

When are you a British resident for tax purposes?

British resident nationals are liable for UK tax on their worldwide income and gains.

You are resident if you spend more than 90 days a year on average in the UK over four years, and more than 183 days in any tax year. The rules are getting tougher, too. At present, days of arrival and departure are not included in this total – enabling nonresident businessmen and women to visit Britain for one-day meetings without fear of their flying visits affecting their tax status. This will change from April.

I am a UK resident. Is it worth keeping money offshore?

Banks say that some people still prefer to have an offshore account because the interest can roll up gross until their self-assessment tax payment becomes due. In other words, they earn interest on the bigger, gross amount.

And many nontaxpayers also prefer offshore accounts because interest is paid gross automatically, so they do not have to apply to the Revenue for an exemption as they would with an onshore account.

I have an offshore account. How can I tell if it was mis-sold?

The ombudsman cannot rule on the management of an offshore account as companies operating outside the UK are not within its jurisdiction.

However, if accountholders were advised to move their money offshore by a company registered with the Financial Services Authority, the ombudsman can investigate complaints to determine whether the advice given was correct.

If, for example, you were told you would save tax by placing money in an offshore account, but that has not turned out to be the case, you may have a valid claim.

Parker said: “It is worth pointing out that the ombudsman can only award up to £100,000 in compensation, so the only way to recover greater losses is by going through the courts.”

I am moving abroad. When will I become nonresident?

You must be nonresident for five tax years to escape UK capital-gains tax on the sale of your British assets. You must be nonresident for three years to escape UK income tax – unless you accept a contract to work abroad for at least a full tax year.

And when do I become nondom?

Even if you are nonresident, you must still pay UK inheritance tax on your assets unless you become nondomiciled – but this is extremely difficult.

You normally take on the domicile of your father, called your domicile of origin. It is possible to acquire a new domicile of choice, if you have left Britain permanently, but you will need to prove to the Revenue that you have severed all ties.

I am a nondomiciled resident. What do the new rules mean for me?

If you are a nondomiciled resident who has lived here for seven of the previous nine years and you do not want to pay UK tax on your offshore income and gains, current proposals state that you will have to pay an annual levy of £30,000.

The Treasury is also clamping down on nondoms’ use of offshore trusts. If an offshore trust set up by a nondom sells a UK asset, there is no capital-gains tax to pay at present. The Revenue has, however, promised not to tax gains realised in offshore trusts retrospectively.

Can I use an offshore bond to escape the crackdown?

Yes, offshore bonds have benefits if you are a UK resident now but intend to retire abroad in future.

They are also being used by nondoms to get round the crackdown.

Offshore bonds are taxed only when they are sold. At that point, a resident higher-rate taxpayer owes 40% on gains, while someone in the basic rate must pay 20%.

You can take an income of up to 5% a year from a bond – onshore or offshore – with no immediate tax to pay.

It is added to your gains when you cash in the bond and then taxed at your highest rate – so if you retire to a country with lower tax rates, you could avoid higher rate tax altogether.

Nondoms could also use the bond to draw an untaxed income while in the UK without having to pay the £30,000 levy.

HOW OFFSHORE BONDS WORK

— An offshore bond is an investment wrapper issued by an insurance company from a tax haven such as the Isle of Man, Dublin or Luxembourg.

— Investors use offshore bonds as the profit on the investment is only taxed when the bond is encashed, thus the tax payable can be deferred to a time of their choosing – perhaps when they have retired to a lower-tax country.

— You can withdraw an income of up to 5% a year from an offshore bond with no immediate tax to pay – so they are likely to prove popular with nondoms hoping to avoid the government’s £30,000 levy.

— Investors who would benefit include higher-rate taxpayers likely to become basic-rate taxpayers in future, residents who plan to retire abroad, and foreign nationals resident in Britain.

Source: Oaklands Wealth Management

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