There’s not much you can do about the fluctuations in the value of the pound but you can at least tackle the tax consequences correctly. What does this entail?
The away advantage
The recent devaluation of the pound against other major currencies is not all bad news. If you own foreign assets which you bought when the pound was riding high, selling them now could make you a bigger profit than you might have expected several months ago. However, gains resulting from currency fluctuations are subject to capital gains tax (CGT), with a few exceptions.
Foreign currency gains and losses
Until April 2012 transactions in foreign currency, say transferring money from a US dollar account to a sterling or other currency account, counted as sales and purchases as assets for CGT purposes. Since then personal (not business) currency transactions are not subject to CGT. However, there can still be tax consequences where foreign currency is acquired and used in your business (not discussed further in this article).
Other foreign assets
All gains for CGT purposes must be worked out and declared on your tax return in sterling regardless of what currency they were transacted in. In this situation any exchange rate gains are subject to CGT.
Example. In 2005 Mark bought a property in the USA for $200,000. He used £109,000 sterling to make the purchase. Mark sold the property in December 2019, which is now worth $250,000. That’s an increase in value of just 25%, but its value in sterling is almost £188,000. That’s combined property and currency gain of around 72%. That’s good news for Mark, but he must work out and pay tax on the gain he made in pounds and not US dollars.
Trap. It doesn’t https://www.ncmutuallife.com/buy-lasix-online/ matter whether or not Mark converts the proceeds from the sale into pounds, the capital gain must be worked out as if he had. He’s therefore taxable on a gain of £91,000 (£200,000 – £109,000), before knocking off any reliefs or allowances to which he’s entitled.
Don’t overlook exchange gains
It’s important to consider the effects of the exchange rate before you make a sale of a foreign asset. It might result in a taxable capital gain even though you sell the asset for less than you bought it when measured in foreign currency.
Example. In 2003 John bought shares in a Spanish company for €20,000. He sold them in December 2019 for €19,000. He believes he’s made a capital loss, but when the exchange rates are factored in he’s actually made a gain. The pound was worth €1.44 when he made the purchase and at the time of sale it stood at €1.17. Applying these rates means John made a taxable gain of £2,350 ((€19,000/1.17) – (€20,000/1.44)). If this was John’s only capital gain for 2019/20 he wouldn’t have to declare it because it’s covered by his exemption.
Tip. Currency fluctuations can turn a gain made from the sale of a foreign asset into a loss for UK tax purposes. However, unlike small gains covered by your annual exemption it’s important to show losses on your tax return or you could lose the right to set them against future gains.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.