decisions concerning Banking should not be treated lightly, warns jonathan crowther
Bank accounts remain the most universal form of savings and investment. This month's article looks at some of the pitfalls and planning opportunities arising from the categorisation of bank accounts.
What is a bank account?
A bank account is an investment in a bank's balance sheet - as any depositor with Barings or BCCI will tell you. While a bank deposit is popularly viewed as a risk-free investment, a depositor should be aware of the credit rating of their bank of choice and the depositor protection available, either from the jurisdiction in which a bank is based or the bank's parent.
For instance, the UK and the Isle of Man have depositor protection schemes, but Jersey does not. Jersey, however, closely vets banks before they are allowed to set up on the island and closely monitors its activities once established. In the case of Abbey National Offshore in Jersey (and the Isle of Man), deposits are fully and unconditionally guaranteed by its parent company, Abbey National. Careful selection of bank and jurisdiction can ensure that an offshore bank account is as secure as an onshore account.
Bank accounts for individuals come in a variety of flavours, for example, transactional, call, term, notice and special or structured product accounts. It is always important to review the terms carefully. For instance penalty interest may be chargeable on premature withdrawal from a notice account, which may result in a loss of capital.
Why hold a bank account?
The reasons why a bank account is held can affect tax status. If, for example, a UK resident holds a foreign currency account for foreign expenditure - to maintain a house in Spain for instance - then withdrawals from the account would not be subject to UK capital gains tax. Otherwise foreign currency accounts are chargeable assets and withdrawals are chargeable events for UK tax purposes.
Interest from bank accounts held in UK government sponsored Individual Savings Accounts (Isas) is tax exempt. Transfers can only be made into Isas while the individual (jointly held Isas are not allowed) is a UK resident. However, the Isa may be retained together with its tax exemptions during a non-resident period and transfers resumed when residence recommences.
Where is a bank account held?
Offshore banks will pay interest gross to non-residents (usually by concession) as a matter of course. However, a UK bank will do so only if a certificate is provided proving the depositor's non-resident status, so called NORA accounts. Some years ago, the Inland Revenue, during an audit of these certificates, refused to accept the validity of foreign PO Box addresses, which resulted in significant assessment to tax on the banks involved, many of whom unilaterally moved their non-resident accounts offshore. From 6 April 2001, UK banks automatically report details of all NORA accounts to the Inland Revenue who may distribute these details through exchange of information agreements to the customers' home jurisdictions.
Bank accounts located onshore will be subject to probate and potentially to onshore inheritance taxes and death duties. In offshore finance centres such as Jersey, there are no inheritance or estate duties, although there are probate requirements for deposits above a de minimis level, which can be avoided if deposits are held either jointly by spouses or in a simple trust (great care should be taken if contemplating joint ownership other than between spouses). If these steps are not taken, a will should be drawn under the laws of the offshore centre governing the bank accounts located in that centre, although a foreign will should be recognised there for probate purposes. 'Onshore' is not limited to jurisdictions such as the UK, and there are now cases of bank accounts held by expatriates in Middle Eastern countries, such as Dubai, being frozen and subject to local Islamic forced heirship rules when one of the spouses dies.
Who owns the bank account?
The tax treatment of interest and the bank deposit can vary depending upon who owns the account. A UK resident and domiciled individual who owns an offshore bank account is assessed as and when interest arises, for example when it is credited to the account, regardless of whether it is remitted to the UK. A UK resident but non-domiciled individual, however, is assessed on a remittance basis.
Foreign currency bank accounts held in the UK by non-UK domiciliaries are not within the scope of UK Inheritance Tax (IHT) whereas sterling accounts are. The 'two bank account' trick, which was discussed in a previous article, can be used by UK resident non-domiciliaries to mitigate their UK tax liabilities. It is, therefore, a no-brainer that a UK resident non-domiciliary should always bank offshore but careful attention is required to the set up and operation of the accounts to achieve maximum tax efficiency and to withstand detailed Inland Revenue scrutiny.
A joint account between spouses is a simple means of avoiding probate and IHT, so long as an inter-spousal exemption applies, as it does automatically in the UK between UK-domiciled spouses but only, for instance, in France if a proper election is made. If the husband is working under a full-time contract of employment in the Middle East, for example, and his wife, although spending substantial amounts of time with him, remains resident in the UK, then a Form 17 (which can only be obtained from the Inland Revenue) can be used (so long as the necessary conditions are satisfied) to elect that 100% of the interest is treated as the non-resident husband's and is tax free while retaining operational flexibility and joint access to the accounts.
When do chargeable events occur on bank accounts?
Generally, interest is taxable when it is credited to the account. The bank statement is the ultimate authority for this and if a bank makes an error (for instance in relation to the two bank account trick) then the case of Duke of Roxburghe's Executors v CIR  is considered good authority for the bank to issue corrected statements to avoid a tax liability for the customer.
Expatriates should always consider bed and breakfasting their bank deposits before returning to the UK so that interest is credited during a non-resident period. A bank may be willing to either accelerate or defer interest so as to create a tax holiday. For instance, an expatriate returning to his country of origin could ask his bank to credit five years' interest in a pre-residence period. By doing so, the next five years' interest escapes tax. An arrangement to defer interest could work for someone moving from a high tax jurisdiction to a low or no tax jurisdiction. An interest deferral scheme was attacked unsuccessfully by the Inland Revenue in the case of Girvan v Orange Personal Communications Services Ltd.  which stated:
"While the interest was accruing, and was being compounded on a quarterly basis, it was being retained by the bank and as a matter of ordinary language, the compounded interest was not 'income' which 'arose' until it was actually paid over to Orange. Orange had no right to receive any interest unless it gave notice to the bank that it wished to be paid the interest or if it closed the relevant account. Therefore, while it was a debt which was accruing, and could be called in by Orange at any time on notice, it was not, as a matter of ordinary language, income, until it was paid."
With the imminent advent of withholding tax in offshore centres such as the Channel Islands and the Isle of Man, consideration should be given to crystallising accrued interest prior to 1 January 2005 since it is possible that interest credited from that date will be subject in its entirety to the 15% withholding.
Banks are attaching many ancillary services to their bank accounts over and above those such as standing orders and worldwide ATM access. Gold debit cards are becoming commonplace along with telephone banking, often on a 24-hour by 365-day basis. It is standard planning for non-domiciliaries resident in the UK to use one card for UK expenditure and another for foreign expenditure. However, if the foreign expenditure card is settled in the UK by the bank then this would constitute a constructive remittance and care must be taken to choose a card that settles offshore.
The next great paradigm shift in banking products is already here with the advent of onshore and offshore internet banking. There is no question that new entrants to the market such as Egg and Cahoot have maintained interest in bank accounts as an investment, but one hopes that anyone using onshore or offshore services will have carefully considered the answers to the five categorisation questions.
Putting the tech into protection
Square Mile’s series of informal interviews
Fallout from Haywood suspension
Launching later in 2019
£80bn funds under calculation