FX Considerations on Sale of Foreign Assets

UK Residents are subject to UK capital gains tax (CGT) on gains in excess of losses and the annual CGT exemption (unless they claim to be taxed on the remittance basis and the gain is not remitted to the UK).

Gains are simply the extent that sales proceeds exceed the original cost of the asset. But when calculating the gain or loss on a foreign asset traded in a non-GBP currency, taxable gains can be inflated, or sometimes even arise out of a loss, in the base currency.

This can happen due to the effect of FX rate fluctuations.

For example, a US investor who has been resident in the UK for more than seven years* purchases shares in a US corporation. The shares were purchased on 1st February 2006 for $100,000 and sold on 31 January 2022 with proceeds of $110,000 realising a gain of $10,000 in the base currency.

(*the significance of this seven-year period is that, if the remittance basis was claimed, there would be a charge of £30,000)

If this $10,000 realised gain was then transferred to a UK bank account on the date of sale the bank would convert it into GBP at 0.714 and £7,140 would be credited to the balance of the account.

The investor may then consider that a capital gain has been realised of £7,140 which is under the annual CGT exemption and so no capital gains tax due.

Now let’s consider how the above transaction must be reported to HMRC.

On the date of purchase the US dollar was trading at $1 = £0.50, and $1 = £0.714 on the date of sale. I haven’t made up these FX rates to spice things up, they are real!

HMRC requires that we convert the original acquisition price into GBP using the FX on date of purchase equalling £50,000 and the proceeds into GBP on the disposal date equalling £78,540 resulting in gain of £28,540.

The investor is now in a situation where they have made an actual gain of £7,140 but are required to report a gain before annual exemption of £28,540!!

The HMRC method of calculating gains has been challenged most notably in Bentley v Pike and Capcount Trading v Evans. In both cases the courts upheld the HMRC approach.

Please also note, the effect to your tax liability can be compounded if the foreign asset being disposed of is a non-reporting offshore fund. The inflated gain may be subject to income tax rates rather than lower CGT rates with no exemption or use of losses.

Please also don’t forget that FX gains can arise to US citizens on the redemption of foreign loans.