People receiving an income in US dollars or euros before converting it to sterling may be hit by capital gains tax, according to Deloitte.
Pound slump causing currency gains headache and capital gains tax liability
The fall of sterling may have left individuals who receive remuneration, interest, dividends or other sums in dollars and euros before converting it to sterling, liable to capital gains tax because currency gains are taxable.
Kirsten Tassell, a partner in private client services at Deloitte in Cambridge, said: “This may come as a surprise to some people, but currency gains are taxable while currency losses can be claimed as capital losses.
“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 someone sold their holiday home in Spain on 1 May 2008 for the sum of €200,000, when the exchange rate was €1.28:£1, the converted value would have been £156,250. If that individual kept the fund in euros whilst deciding what to do with it, before eventually converting it to sterling on 31 January 2009, when the exchange rate was €1.13:£1, the converted value would have increased to £176,991. The chargeable foreign exchange gain on this is £20,741, taxable at the capital gains tax rate of 18 per cent after deducting the available annual exemption.
All acquisitions, disposals, withdrawals and deposits of foreign exchange have to be tracked, which can be an onerous, time consuming task but not every disposal of foreign currency is subject to capital gains tax.
“There is an exemption, in that capital gains tax does not apply to foreign exchange that has been acquired for personal expenditure outside the UK, such as a holiday,” said Ms Tassell.
“Interestingly, expenditure for these purposes includes that spent on the provision and maintenance of any residence outside the UK.
“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 capital gains tax 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.”
For further information please contact Kirsten Tassell on (01223) 460222.
The Deloitte Cambridge office comprises 8 Partners and over 250 staff who deliver a full range of professional services to the East Anglian region. As well as focussing on the life sciences and technology sectors for which the region has become so renowned, the office has long standing specialisms in other sectors including the professions, consumer business, food and agribusiness.