New Zealand

[simpo two]

A friend tells me that the base rate in NZ is 6.5%. So could I invest a chunk on deposit there, how would I go about it and what would be the tax situation?

Would it be the same kind if thing as the Channel Islands used to be before the European Savings Directive?

[Eric Mc]

Em - what type of thing before the European Savings Directive?

If you invest in a New Zealand bank account, you may very well have tax deducted at source on the interest received at 6.5%. However, you are still liable to UK tax on your WORLDWIDE income as you are a UK resident. Therefore, you are still obliged to notify the Inland Revenue of your overseas interest earnings and you are still liable to UK Tax on those earnings. As New Zealand has a Double Taxation Agreement (DTA) with the UK, you should get a credit for the 6.5% tax already deducted in NZ.

These are the tax rules that have been around for years.

And, of course, in your efforts to escape UK tax, you are exposing your investment to the risk of fluctuating exchange rates.

[simpo two]

Well, tax aside, it seems that NZ deposit accounts should pay more interest than UK ones due to the base rate being about double. As for currency fluctuations, that can go either way - just like the FTSE. If an NZ bank does Sterling accounts, that would be avoided anyway, I imagine.

It may not fly for other resaons; can anyone think of any?

[Eric Mc]

Currency fluctuations are a serous risk for overseas investments.

Of course currency rates can fluctuate either way. Whether you want to have a go in this area depends on your personal approach to risk as to whether you are prepared to sink your funds into a volatile investment. You have to weigh up the tax benefits (of which I think there are none) against the internal rate of return benefits - of which there may be some, although that can change too.

The very real volatilty of foreign currency exchanges is the big issue as far as I would be concerned.