The pros and cons of an offshore account

You won't see advertisements in the British press promoting the advantages of holding your money offshore - but there is nothing, in principle, to stop UK residents from opening an offshore bank account with one of the numerous subsidiaries of well-known banks and building societies operating in Jersey, Guernsey or the Isle of Man.

And indeed, in years gone by, tax loopholes made it attractive for many investors on the mainland to do just that, deferring tax on their investment earnings for years in the process. But things have changed as the present government has made big efforts to minimise offshore attractions for taxpayers. So, as a UK resident, is there anything still to be gained from an offshore account?

First of all, let's put paid to a common misconception - there's no escape from the Revenue by sticking your cash offshore, because as a UK resident you are liable to pay tax on your earnings worldwide, regardless of where they're held. Offshore accounts are not designed for tax evasion - but they may be useful for tax deferral in certain situations.

Furthermore, the eye-catching rates which lured investors offshore two or three years ago are simply not there any more. The offshore advantage has been whittled away - partly by increasing competition from high-paying onshore accounts (especially tax-free Tessas and ISA), and partly by the fact that offshore centres have gone to great legislative lengths to make themselves "respectable". In the process, most of the UK bank subsidiaries have stopped having to pay headline interest rates to compensate for the perception of offshore banking as a relatively risky option.

In fact, the savings rates offshore are now if anything lower than those onshore. On a deposit of £10,000 in an offshore no-notice account, you could earn at best 6.25 per cent gross with Skipton Guernsey. Onshore, by contrast, you're spoilt for choice with better rates: 6.55 per cent from Abbey National or Scottish Widows Bank, 6.8 per cent from First-e on the internet, 7 per cent from Northern Rock or 7.05 per cent from Bristol & West.

Notice accounts and bonds are marginally better offshore, with a top rate of 7 per cent from Portman Channel Islands, compared with 6.7 per cent from the Alliance & Leicester among others. But the bottom line is that for savings you can earn as much interest onshore as offshore; the difference lies in when and how you pay tax on it.

Peter Shirreffs at the Royal Bank of Scotland International (RBSI) explains. "Because interest is paid gross, rather than being automatically taxed monthly as it is in the UK, there can be a cash flow advantage for savers. If you time things right, you may be accruing interest offshore for almost a year before you have to declare it to the Revenue, so you're earning interest on your interest. That time lag can be a big attraction for customers with larger sums particularly." For example, if you are paid interest on your account at the beginning of February, you will not have to declare it on your self-assessment form until 31 January the following year.Mr Shirreffs also points out that there is an element of bank confidentiality offshore which is not present on the UK mainland. "It's not a matter of confidentiality from the Revenue, but from friends, family or business associates," he says. "In the UK it's easier to get hold of banking references and work out people's wealth by asking strategic questions, but there's no chance of the banks answering questions like that offshore."

So which of the groups living in the UK should consider holding money offshore?

Foreign nationals working in the UK will only be taxed by the Revenue on the money they earn or bring into the country, so any overseas earnings or savings are better off in an offshore account where they don't have to be declared.

Higher rate taxpayers looking for extra months in which to build up interest are the main holders of offshore bank accounts in the UK.

If you have property or family abroad, or do a lot of international work, it can be useful to have a multi-currency cheque account which operates as a normal bank account but, as you might guess, enables you to write cheques in a variety of currencies. They are more commonly available offshore; in this case the advantage is a matter of convenience rather than tax planning.

As far as offshore fund investment is concerned, Martyn Laverick at IFA Chartwell comments that it can offer advantages for wealthier investors. "But you should utilise all your onshore tax allowances first, including this year's full £7,200 of capital gains allowance and your £7,000 ISA allowance," he advises.

If your higher rate tax status is going to change in the coming years - for example, if you're likely to retire, or planning to moving abroad altogether - then you could place money in an offshore portfolio bond (which allows you to buy and sell holdings without incurring tax in the process), or an offshore roll-up or accumulator fund. These investment vehicles do not pay out dividends but roll up the growth until the investment is cashed in. The aim, of course, is to wait until you've moved into the basic or nil rate tax band before liquidating your investment. Some fund management companies (for example Newton International in Jersey) operate so-called umbrella funds, so you can switch between sub-funds if you want to adjust your holdings.

Even if you're not retiring imminently, offshore investment may make strategic sense as a higher rate taxpayer. "Once you've invested up to your CGT limit, which for a husband and wife earning at around 7 per cent per year would mean joint investments of around £200,000, you could go offshore for any further investments, which will mean you can defer paying tax on them until a more convenient time," explains Mr Laverick.

He also points out that the increasing numbers of UK residents with an international working life, spending odd years posted overseas here and there, are best off investing offshore in a neutral base and repatriating the earnings when it makes sense from a tax point of view - for example, in a year when they are not generating any income within the UK. But tax planning can involve careful timing, and if you're going to use offshore holdings as part of your strategy then it makes sense to get independent advice from a financial adviser.