High tax on foreign accounts

As some prominent people are now discovering, overseas bank accounts are not all they were cracked up to be. If there are any misconceptions left about the viability of these accounts as safe havens for unreported money, the revelations of the Dunnes payments tribunal has probably done much to dispel those myths. Despite its role as one of the deposit takers in the convoluted banking dealings that have been revealed in the Dunnes payments tribunal, Denis McCarthy, senior manager at Irish Intercontinental Bank's private client office recently told Family Money that the apparent attractions of holding a legitimate foreign bank account need to be tempered by two factors - the rate of interest on offer, which is unlikely to be any more competitive than that available from an Irish bank and the higher tax that must be paid on that interest.

With exchange controls gone since 1993, home-based deposits have had to compete with foreign banks and it is reckoned that by 1995 £1.3 billion was in offshore accounts. Yet in the lead-up to EMU, it is expected that many more people, and not just the very wealthy, will be attracted to the idea of an offshore account, says Mr McCarthy. The problem is that too often people do not understand the implications of such a move.

AS some prominent people are now discovering, overseas bank accounts are not all they were cracked up to be. If there are any misconceptions left about the viability of these accounts as safe havens for unreported money, the revelations of the Dunnes payments tribunal has probably done much to dispel those myths. Despite its role as one of the deposit takers in the convoluted banking dealings that have been revealed in the Dunnes payments tribunal, Denis McCarthy, senior manager at Irish Intercontinental Bank's private client office recently told Family Money that the apparent attractions of holding a legitimate foreign bank account need to be tempered by two factors - the rate of interest on offer, which is unlikely to be any more competitive than that available from an Irish bank and the higher tax that must be paid on that interest. "The relatively low Irish pound interest rate is increasingly forcing the personal depositor to seek out opportunities for higher after tax returns on deposit funds," says Mr McCarthy. Money has become much more mobile in the relentless pursuit of an increased return.

With exchange controls gone since 1993, home-based deposits have had to compete with foreign banks and it is reckoned that by 1995 £1.3 billion was in offshore accounts. Yet in the lead-up to EMU, it is expected that many more people, and not just the very wealthy, will be attracted to the idea of an offshore account, says Mr McCarthy. The problem is that too often people do not understand the implications of such a move.

"Section 41 of the Finance Act, 1995 obliges residents of the Republic of Ireland to report details of the opening up of foreign bank accounts to the Revenue Commissioners, via their annual tax returns. Financial institutions which assist private individuals in setting up such accounts are also obliged to notify the Revenue of transaction details. "From a tax perspective, interest income on domestic deposit accounts is treated differently from interest earned on the foreign account and it is vital," he explains, "that the personal depositor makes the investment decision in the context of after-tax return."

As the table below illustrates interest on a domestic Special Savings Account is just 15 per cent and there is no other tax liability or requirement to declare the interest on tax returns. Tax on interest earned on an ordinary deposit account is charged at 26 per cent and must also be declared as income on your tax return - PRSI and other levies will apply. Interest from foreign bank accounts is paid gross and must be reported. It attracts the top rate of 48 per cent income tax where applicable and PRSI and employment levies can also apply.

"The net result," says Mr McCarthy, "is that the foreign option, on our example of £100,000, generates an after tax return of just 2.99 per cent, making this the least favourable option."

So who should consider a legitimate offshore bank account? "It is an effective deposit instrument only for those who are not liable to income tax." In terms of convenience, however, anyone doing regular business overseas, if you have a holiday or retirement home or if, as many parents do, you are supporting a child in college in a foreign country might consider the convenience of a foreign bank account. In these cases, however, the motive is to have the account for consumption purposes rather than for income and any interest earned on the account will be negligible.