Donald Simpson: UK banks versus offshore banks
Friday, September 28, 2012
Donald Simpson explains the ramifications of banking onshore to offshore on Expatmoneychannel.com.
It is always important to be alert to where cash deposits are held and in which currency. While detailed financial and investment advice should be taken on which currencies to hold, more general points apply to where funds should be held and how borrowings should be structured. Banks’ lending criteria have become more restrictive following the banking crisis and existing loans may no longer pass lending criteria. This can be a major problem when review dates are looming.
When you are no longer UK tax resident any bank accounts held in the UK can pay interest gross with no tax deducted. While there would be no tax advantage in placing savings offshore, offshore banks tend to offer more competitive interest rates. One reason for this is that offshore financial centres attract larger deposits, resulting in a more competitive banking market. When placing deposits, be sure to check that no withholding taxes apply in the jurisdiction where your savings are held which could reduce the interest you receive.
Another factor to consider is the timing of interest payments. You may require regular interest payments to supplement your income. In other scenarios, receiving interest when a term deposit matures can be very tax efficient. This is especially true if you have moved to a jurisdiction which does not tax interest, or at least does not tax interest arising outside its borders, when interest is finally paid.
Wherever funds are placed it is important to think about the security of your deposits. Over the last few years counterparty risk has become a major concern. Where savings are held with UK or EU banks the Financial Services Compensation Scheme or local equivalent will apply. The deposit compensation limit is presently €100,000, or £85,000 in the UK. This limit applies per person for each institution. Where funds are held with two different banks which are part of the same authorised institution the limit remains £85,000. Where you have more than £85,000 it is possible to spread it between different institutions to increase the amount guaranteed by the compensation scheme. Traditional offshore financial centres, such as Jersey or Switzerland, are outside the EU and not covered by the EU’s compensation scheme. Depending on the jurisdiction, there may be some protection afforded locally. During the banking crisis certain well capitalised Swiss and Asian banks were seen as safe havens even without any government backed protection scheme applying. Depositors should now be aware of counterparty risk and take specialist advice.
Where borrowings are to be secured on assets located abroad then it is important to deal with banks which understand that market. Usually this will mean banks in the same jurisdiction as the asset although certain international banks will have the necessary experience.
In the UK the responsible lending rules impose limitations on who banks can lend to and the extent of borrowings. The age of a borrower has become a more critical factor. Where retirees have borrowings secured on property, and the borrowings are due for renewal, this can be a major issue if the bank which previously facilitated the borrowings rules that the borrower or property no longer fulfils the bank’s lending criteria.
To prevent such problems it is important to ensure no covenants are breached which could give a lender cause to review such arrangements before a fixed review date. Where old borrowings no longer satisfy new lending rules, it may be possible to restructure the borrowings. For example, ownership of the securitised property could be transferred to a company, trust or nominee structure or even down a generation with the bank then lending to that new owner. In such arrangements, the tax implications of the restructuring would need to be considered along with how to satisfy any other requirements of the lender.
Death Taxes and Debts
Depending on the jurisdiction, one solution to avoid death taxes on a property can be to reduce its net value by burdening the property with debt. In these responsible lending times banks may be less willing to enter into such arrangements. A well-connected intermediary or adviser is key in such circumstances and may be able to suggest additional security for the banks so that they remain comfortable with the arrangements.
The banking crisis and low interest rates cause problems for many savers. With the tightening of banks’ lending criteria, borrowers have not always been able to take advantage of historically low interest rates and many existing borrowings which were put in place for tax planning purposes could face difficulty at renewal dates. In this new banking environment it is important to take legal advice on such structures so that creative solutions can be devised where there are potential problems. Remember, it’s not just people that are internationally mobile, money is too.
If you would like more information on the issues covered in this article, contact us on 0131 228 8111 or fill in a quick contact form and one of our advisers will respond as soon as possible.