Slumping Pound Causes Capital Gains Tax Headache

by Jason Gorringe, Tax-News.com, London

31 March 2009

The fall of sterling against the US Dollar and the Euro in recent months may have left individuals who receive remuneration, interest, dividends or other sums in these currencies and are converting it to sterling, liable to capital gains tax (CGT).

Nicola Roberts, director in the private clients practice at Deloitte, says: “This may come as a surprise to some people, but currency gains are taxable while currency losses can be claimed as capital losses."

She adds: “In particular, the weakening of the Pound against the US Dollar and Euro in the last 12 months means some people could be sitting on significant currency gains. Tax can arise on the acquisition and disposal of the currency itself as well as when making deposits and withdrawals from foreign bank accounts.”

For example, if an individual sold their holiday home in Spain on May 1, 2008 for the sum of EUR200,000, when the exchange rate was EUR1.28:GBP1, the converted value would have been GBP156,250. If that individual kept the funds in Euros whilst deciding what to do with them, before eventually converting them to sterling on January 31, 2009, when the exchange rate was EUR1.13:GBP1, the converted value would have increased to GBP176,991. Therefore, the chargeable foreign exchange gain is GBP20,741, taxable at the CGT rate of 18% after deducting the available annual exemption.

Deloitte warns that all acquisitions, disposals, withdrawals and deposits of foreign exchange have to be tracked, which can be an onerous task and extremely time consuming. However, not every disposal of foreign currency is subject to CGT.

Roberts adds: “There is an exemption, in that CGT does not apply to foreign exchange that has been acquired by an individual for personal expenditure outside of the UK, such as a holiday. Interestingly, expenditure for these purposes includes that spent on the provision and maintenance of any residence outside of the UK."

She concludes: “However, holding foreign currency on a speculative basis (even if it is intended to spend outside the UK on family holidays), will not fall within the exemption. There can be a fine line between having a CGT liability and being within the exemption and therefore, as a bare minimum, it would be in the taxpayer’s interest to keep track of all significant transactions involving potential foreign currency gains or losses.”

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