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Offshore investors brought to account

The investigation being conducted by HMRC’s offshore fraud projects team does not mean that UK investors cannot hold offshore accounts but individuals who are resident and domiciled in the UK must report their offshore accounts to HMRC.

HMRC says the letters are part of its investigations into tax evasion but it will not reveal where the information about the accounts came from. A spokesman says: “We use many different sources of information.”

Accountants suggest that the EU’s savings tax directive, which came into force in July and requires member countries to levy a 15 per cent withholding tax or exchange information with an account holder’s home tax authority, is the reason for the move.

The letters ask offshore account holders why there is no tax liability from their account. Recipients of the letters were given only 30 days to reply. HMRC has not said what will happen if there is no reply within 30 days but accountants expect that this would lead to an inquiry.

An HMRC spokesman says: “Much more information is becoming available to us through various sources about the holders of such accounts. We would like to give people who use such accounts legitimately and appropriately an opportunity to let us know that, without involving them in a full inquiry when that may not be necessary.”

Andrew Watt, director of tax investigations at tax consultancy Chiltern says: “Many people are unaware of whether their overseas income is taxable in the UK and may not have thought to take professional advice. Receiving a letter from HMRC referring to tax evasion and possible prosecution will be extremely alarming for them.

“In the first instance, we would advise people to check that they have no undisclosed non-UK bank income and, if this is the case and their tax returns are correct, to simply reply to HMRC to that effect within the deadline. There seems no need to supply extra information. Anyone who is aware that they have undisclosed non-UK bank income should take professional advice immediately.”

The investigation mean that investors with offshore bank accounts must include these accounts on their self-assessment return and pay tax on the interest every year. As the interest on offshore accounts is paid gross, however, this can present an advantage through the compound effect over a number of years.

Yorkshire Guernsey managing director Peter Symes says: “If you receive interest in April 2005, you will not pay tax on it until the following year. Every year, offshore investors can earn interest on the interest until the tax is paid. If there is a large amount of money and it is kept offshore for many years, there will be a significant advantage over keeping it onshore.”

Offshore accounts do not normally pay a higher rate of interest. According to Money- facts, Nationwide pays 4.95 per cent on a no-notice offshore account while the best no-notice onshore accounts are the AA on 5.06 per cent followed by Scarborough Building Society on 5.05 per cent.

Some offshore banks offer deferral accounts which enable the holder to avoid paying tax on the interest until they withdraw it and bring it into the UK. If the investor plans to move abroad or retire in the next few years, this can help them to reduce their eventual tax bill as they may be in a lower tax band when they access the money. Some banks are cautious about whether these accounts are permitted by HMRC.

If holders include their offshore account in their tax return, they should ask their bank to provide their details to HMRC under the EU savings tax directive, otherwise the bank will levy a 15 per cent withholding tax. Individuals who are UK-resident but not domiciled do not have to report their offshore accounts to HMRC. As long as they do not remit money from their offshore accounts to the UK, they do not pay tax on the interest.

One reason for holding offshore bank accounts can be to deposit rental income in foreign currencies from overseas property. Investec Bank Guernsey head of client services Anna Malcolm says that currency accounts are one of the differentiators between onshore and offshore banks.

As few UK banks provide accounts in dollars or euros, the rates of interest are not very competitive compared with offshore banks.

Malcolm says account holders receive a high standard of service from banks in the Channel Islands and Isle of Man. She says: “It is common for people to complain about the quality of service they receive from UK clearing banks but offshore banks have smaller client bases and provide a more individual service. As offshore banks generally deal with wealthier and more sophisticated customers, they have experience and knowledge of a wider range of products and issues. Yet offshore banks have standard charges and costs.”

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