Which offshore financial centre is the best?

Expats have a range of choices – so how do they find a safe home for their assets?

The traditional use of offshore centres as a way of enabling better tax planning – and even tax evasion – has all but fallen away. An increasing desire for countries to share tax information to ensure they are not missing out on any revenue has led to a tightening of legislation in offshore financial centres, which has given depositors more security than ever.

Jersey, Guernsey and the Isle of Man all boosted the level of protection they offered expat depositors, for example, after the credit crisis to protect them if something should go wrong.

The Jersey Depositors Compensation Scheme protects up to £50,000 per person at each Jersey banking group, which means a £100,000 deposit in a joint account would be completely covered.

If a Jersey bank does fail, then an interim payment of £5,000 will be made to the affected depositors within seven working days, with the balance of compensation arriving within three months.

The Guernsey Banking Deposit Compensation Scheme is akin to the Jersey scheme, with the amounts covered and timing of payments in line with each other. Both also have the total amount of compensation available to depositors capped at £100m in any five-year period, with compensation reduced pro-rata if claims breach this level.

The Isle of Man Depositors’ Compensation Scheme would pay you 100pc of the amount you have on deposit with a bank that is in default to a maximum of £50,000 – but again, if you have a joint account you are both able to claim up to £50,000 meaning £100,000 of deposits would be covered.

You would need to make a claim for compensation from the DCS within six months of the bank being declared in default. An interim payment is usually made to depositors after 28 days.

Gibraltar has a variety of favourable tax rules – no wealth tax, no capital gains tax, no tax on investment income and no inheritance tax – making it a favourite destination for a number of family offices.

The Gibraltar Deposit Guarantee Board (GDGB) will pay 100pc of the qualifying deposits with a bank that has been declared in default up to a maximum of €100,000 or the sterling equivalent. If the claimant has any insurance policies that would cover the deposit or receives payment from other deposit guarantee schemes, these will be deducted from the total. This makes it one of the more generous schemes in the UK overseas territories.

However, as the sharing of information between different jurisdictions has improved, the benefits to having assets offshore have become more limited thanks to legislation such as the EU Savings Directive (ESD) which allows for the application of withholding tax. The directive means that in European Union member states, the authorities will automatically inform the tax authority in your country of residence how much interest you received. The ESD applies to the Channel Islands, Isle of Man and Gibraltar. The aim is to ensure that citizens of one member state do not evade taxation by depositing funds in another.

The Isle of Man has put itself at the forefront of the fight against tax evasion by signing up to a historic agreement in Berlin last month which moves it towards a new global standard for tax information exchange.

Treasury Minister Eddie Teare signed the agreement which commits the 51 signatories to share information automatically in line with the Common Reporting Standard developed by the OECD and endorsed by the G20 group of major economies earlier this year.

The main reasons why an offshore bank account may be beneficial are potential tax efficiency, flexibility and convenience and providing a a secure location for funds. If an expat lives in a country with a less than secure banking environment or where the local currency is extremely volatile, then having a secure offshore account can make sense. However, the main reason for the majority of expats to consider opening an offshore bank account is the potential flexibility they will gain in having one central account. Accounts can also be opened in different currencies.

However, a recent report did sound a note of caution. The global financial centres index, published by the London-based Z/Yen Group consultancy last month, said they “continue to struggle with reputation and regulation”.

Although offshore financial centres scored higher than a few years ago, all 14 tracked in the index saw their ratings decline since the last index published six months prior. The index rates centres based on instrumental factors and responses to an online survey.

The British Crown dependencies of Jersey, Guernsey and the Isle of Man dropped significantly in the ranks, the report said. The British Virgin Islands topped the offshore centre league, followed by Gibraltar and the Cayman Islands.

The aim of the global financial centres index is to examine the major financial centres globally in terms of competitiveness.

These league tables have some use for expats when choosing where to bank or invest, but the financial strength and track record of the individual banks or fund managers is more important, according to financial advisers Blevins Franks.