Savers with money in tax havens such as Guernsey and the Isle of Man could be forced to pay tax on their offshore bank accounts to fund a deposit protection scheme.

Industry experts believe that the measure may be announced as part of a government-backed review into offshore financial centres.

Andrew Jupp, head of tax at Tenon, the accountant, said: “I would not be surprised if we saw a tax levy on income from offshore bank accounts as the quid pro quo for granting some level of protection, such as guaranteeing a certain level of cash deposits. The Treasury could try to strike a deal with overseas banks to ensure a certain amount of interest is withheld at source.”

The review, which was announced by the Chancellor in last month's Pre-Budget Report, will examine the regulation and transparency of offshore havens, as well as their tax arrangements. It comes as confidence in offshore banking has plummeted after thousands of British savers lost money in offshore accounts owned by Icelandic banks this year. Depositors with Landsbanki Guernsey have recovered only 30 per cent of their money, whilst customers of Kaupthing Singer & Friedlander Isle of Man (KSFIOM) still cannot access any of their money. Their situation will become clearer when the liquidation of KSFIOM is completed.

The banks were offering returns of up to 7 per cent on cash deposits, but many savers did not realise that the Financial Services Compensation Scheme, which guarantees up to £50,000 of savings, does not protect them.

Action groups set up by savers have accused the Government of ignoring their plight after the Treasury refused to bail out those with offshore accounts, as it had done for Icesave customers in the UK. Alistair Darling has stood firm against the compensation calls, but has hinted that change may be afoot. He said: “The recent financial turbulence has highlighted potential problems with overseas territories and crown dependencies, such as the Isle of Man and Channel Islands. They attract banking customers with lower taxes, without contributing to the UK Exchequer. The British taxpayer cannot be expected to be the guarantor of last resort. But at times of stress, depositors need to know who will compensate them.”

The offshore review got under way last week and is being lead by Michael Foot, previously managing director of the Financial Services Authority. It will cover Jersey, Guernsey, the Isle of Man, Bermuda, the Cayman Islands, Gibraltar, the Turks and Caicos Islands, the British Virgin Islands and Anguilla, but not Luxembourg.

A key issue for the review is that specific tax arrangements and deposit protection schemes vary amongst the different offshore territories. Anna Sofat, of Addidi Wealth, an independent financial adviser, said: “Many of our clients have savings or investments offshore and some more clarity on what protection is available would certainly be welcomed, as would a common approach within the EU.”

The review is also likely to examine ways that offshore investors and savers evade UK tax. Offshore accounts are widely used by non-domiciled people living and working in the UK, who do not pay income tax, capital gains tax or inheritance tax on any assets outside the UK. After a previous crackdown, non-doms now must pay HM Revenue & Customs (HMRC) £30,000 a year to continue that arrangement after seven years of residence.

Tens of thousands of British citizens living and working abroad also use offshore facilities. Many of the people who lost money in Icelandic offshore banks were expatriates who had retired abroad and were told that they could not open a UK bank account without a UK address.

Interest on offshore savings is paid gross without income tax being deducted. The Treasury estimates that 50,000 people do not declare this income on their tax returns. Even if tax is declared, offshore accounts can still benefit big savers because interest is earned on the gross amount, which produces bigger returns.

Offshore investments also have beneficial tax arrangements. Normally investors do not pay UK income tax until offshore bonds are cashed in, or withdrawals of more than 5 per cent a year are taken. If the investments are contained within an offshore trust, it can also protect the assets from UK inheritance tax.

HMRC has already begun a fresh crackdown on offshore savers by sending letters to 55,000 individuals suspected of failing to disclose income on which UK tax should be paid.

Mr Foot will produce his review's interim conclusions in time for the 2009 Budget.

Not so safe havens

— Jersey No scheme in place. The Jersey Treasury announced on October 3 that all residents' deposits were fully protected, but this does not cover those living outside Jersey. The Government and the finance industry are currently devising a deposit compensation scheme.

— Guernsey Up to £50,000 is guaranteed. This was announced on November 26, which was too late to help savers with Landsbanki Guernsey. However, the scheme has access to only £100 million, which is significantly less than would probably be required to compensate savers of a collapsed bank. It cost the UK Treasury £800 million to fund the compensation of 240,000 British depositors with Icesave.

— Isle of Man Up to £50,000 is guaranteed. The Isle of Man Treasury has £150 million for the scheme, in addition to payments from the banking sector. The 8,000 depositors in KSFIOM have more than £820 million at risk.

— Luxembourg Up to E20,000 is guaranteed. Savers with Landsbanki Luxembourg, which also went into administration on October 8, have started to make claims on the scheme. A Bill is going through the Luxemburg parliament to increase the limit to E100,000, but this will not help those with Landsbanki Luxembourg.