Offshore banking and money transfers
Offshore banking and saving is not just for the very rich – thousands of expats access their money from overseas through an offshore branch of a British bank or building society.
The first thought of many expats is that offshore banking involves tax avoidance, but that simply is not true.
Although some offshore banking centres have had a bad press, international banking is an important financial service for millions of expats worldwide.
An offshore account means a bank current or savings account that is not based on the UK mainland.
Even though some are open to everyone, most ask that an expat lives in the place where their banking is run from.
Offshore banking choices are limited
Expat customers with many UK banks and building societies have reported that they are on notice to close their accounts or must hand back their credit cards because they no longer have an address in the UK.
They then have problems opening an offshore account as many providers are pulling their services.
The latest to close is Nationwide International, the offshore brand of the UK’s largest building society. The society blames closure on falling demand, the cost of providing the service and poor market conditions.
Some popular banks maintain an offshore presence.
Santander, NatWest, Lloyds and Barclays offer banking and saving accounts. Other specialist banks, such as Ireland’s Permanent, Standard Life and Kleinwort Benson also provide some services.
Most of the accounts are based in Gibraltar, the Isle of Man or Channel Islands.
Opening an offshore account
Tough tax and money laundering rules aimed at restricting how crooks and terrorists move their money have complicated how offshore banking works, but opening an offshore account should not be too difficult.
The bank will want to identify you as a customer, confirm where you live and if they can, look for any financial history.
They will want to know:
- The reason for opening the account
- Where any money deposited in the account comes from, especially large lump sums
- Your plans to make deposits and the source of the cash
Offshore accounts and tax
The location of the bank should not make any difference to if an expat reports any interest earned to their local tax authority.
Claims of tax avoidance arise from expats failing to declare any cash or investments they have offshore.
Two important sets of tax rules oblige foreign banks and financial institutions to report the personal and financial details of customers to their local tax authority.
The tax authority will then pass this information on to their colleagues in the country where an expat lives for cross-checking against their tax returns.
If you are American, have dual nationality with the US or bank with someone who is American, the Foreign Account Tax Compliance Act (FATCA) means the bank will report the balance of any account that is more than $50,000 if they are a US resident.
If they are a US expat, the threshold rises to $200,000.
The common reporting standard (CRS) is a financial information swapping network set up by more than 50 countries, including most of the European Union and the UK’s crown dependencies and overseas territories.
CRS has no reporting threshold but bilateral definitions of what information to exchange.
Protecting your money on deposit
One important point about protection for cash on deposit with a foreign exchange service is that the money held falls outside of the UK Financial Services Compensation Scheme (FSCS).
The FSCS provides compensation for account holders if they lose money up to a certain level kept in a bank account.
Gibraltar, the Isle of Man, Jersey and Guernsey all have similar protection, but the levels of cash that they safeguard vary and are different from those in the UK.
Before opening an offshore account, always check the financial safety rules and how they might apply to any money you have on deposit with a bank.
Foreign currency accounts
Offshore accounts come in three main currencies for UK expats – Sterling, US dollars and Euros.
It’s a good idea to have a savings account denominated in the same currency as the one you spend day to day as you won’t have exchange conversion charges or suffer too much if the exchange rate tumbles.
What's the best offshore bank account?
The limited range of accounts each have their advantages and disadvantages, but there is no real 'best account' it just depends on your personal circumstances and which one suits your needs.
Transferring money overseas
Sending money abroad seems to cost the Earth, but in almost every case, there is a cheaper option depending on how quickly the money is needed at the other end.
It does not matter if the payment is a one-off or more regular.
The two key factors are the transfer fee and exchange rate.
Fee-free deals are a marketing ploy as the exchange rates are carefully adjusted to make sure any discount offered on the fee is compensated.
Every money transfer attracts a fee or the agent could not stay in business.
Each firm has their own list of charges which makes pricing hard to compare, and they disguise their costs by adding small charges to your bill.
Most agents do not publish exchange rates with the excuse that the rates change through the day and they cannot keep up with posting them, so asking for a rate to compare with another service is almost impossible.
Finding the best exchange rate
Frankly, don’t bother looking for the best rate, it’s a waste of time and a red herring.
Look at the total cost of the transfer and how much bang you get for your buck in terms of foreign currency for your pounds.
Ignore claims of commission free deals and best exchange rates and just look at what you get for your money.
A good money transfer operator should give information about exchanging currencies in writing.
The quote should include:
- The exchange rate
- Details of fees and other charges
- A reference number
- Information about how to collect the transferred money and if the operator receiving the cash makes any charge
- How long the transaction will take and confirmation of the final cost
Don’t forget to ask if the operator has enough foreign exchange on hand to complete the transfer to schedule.
Is your cash safe during a money transfer?
Beware of transferring large sums to an operator as the Financial Services Compensation Scheme that protects money on deposit with a bank does not apply to money transfer services.
Big players in the market transferring more than £2.5 million a month into foreign currencies must be authorised by the Financial Conduct Authority (FCA). They must also run a client money protection scheme to separate your cash from that in the business.
The protection scheme should safeguard some, if not all, of your money but check if the compensation paid is capped and whether it’s worth sending smaller amounts at a time to gain full protection.
Smaller operators will say they are registered, but this offers no consumer protection.
The FCA keeps a register of authorised and registered firms for online searches
If a money transfer service is not authorised or registered, do not give them any cash.
Moving small amounts
Some banks and money transfer companies let customers switch small amounts online or between bank accounts.
The small amount cap varies between operator, but typically applies to transfers of between £400 and £5,000.
The transfer can take a few days.
Several banks allow account-to-account transfers but often tie-in the service with minimum deposits and demand the accounts are in your name at both ends of the transfer or the person receiving the cash has an account with them as well.
Internet money transfer operators accept money in Sterling and then convert the cash to a foreign currency and pay into the receiving bank account a few days later.
These transfers are scheduled in working days, so leave more time over a weekend or bank holidays at either end. Typical timescales are two to four working days.
Who’s the best money transfer service?
It's good practice to look for quotes from several money transfer services before agreeing a deal to try and track down the best price.
We've done the research already and have found CurrencyFair to be a very reasonable price every time. It is easy to get set up and after your account is verified, you can transfer money using their app.
Moving large amounts of money
Fewer money transfer firms send large amounts of cash overseas.
Expats are more likely to use a service like this to move money around the world to buy property, make investments or to make regular payments, such as mortgages, pay bills or make pension contributions.
For regular transfers, some operators have 12-month fixed rates, but these can be a gamble depending on how you figure exchange rates may change over the year.
The best exchange rate will probably come from a specialist currency broker rather than a bank.
The brokers tend to slice a small fee from every transaction which soon adds up as they exchange hundreds of millions of pounds every year.
Who’s the best foreign currency broker?
No single broker always offers the best money transfer deal, so look for quotes from several before committing.
Some of the biggest names in the market, in no order of preference, are:
- Currencies Direct
- FC Exchange
- UK Forex
Sending regular payments overseas
The cheapest option for sending regular payments overseas is to set up an offshore account with an international branch of your bank or building society, if they have one.
As a customer, the operator may offer a preferential rate that could match those offered by exchange brokers.
Sending money in an emergency
If you need to send cash anywhere in the world to arrive as soon as possible, the money transfer services of last resort are Western Union and MoneyGram.
You will pay for the privilege of an almost instant transfer, and sometimes waiting 24 hours for a cheaper service is more cost-effective.
You can either visit an agent, hosted by newsagents, post offices and small stores, or send money online.
Fees vary depending on if the transfer is online or picked up in cash at an agency.
Sending £500 via Western Union to the USA can cost £24.90, while moving £1,000 to Sweden costs £85.
If the money transfer goes wrong
If your foreign exchange transfer fails to go through, speak to the operator first and trigger their complaints procedure.
Consider taking the complaint to the Financial Ombudsman if the firm is authorised and the complaint is not settled to your satisfaction.