The Chancellor’s mini-Budget on 23 September delivered radical and unexpected policy announcements.
Markets have responded negatively as the pound falls to new lows against the US dollar, resulting in further Bank of England interventions. Questions are being posed about whether the Chancellor and Prime Minister can hold their course but in the meantime these movements in foreign exchange (FX) rates can have implications for businesses and investors – which are not always well understood.
Currency movements have tax impacts. In the corporate world, tax relief for FX gains or losses tend to follow their treatment in the company accounts, and then whether the underlying asset giving rise to the gain or loss is taxable. FX gains and losses on debt and trading stock (for example) are taxable and relievable as they arise, whereas gains and losses on property assets are generally only relieved or taxed on an eventual disposal.
From a personal perspective, the rules are a little different. Since April 2012, gains and losses on foreign currency bank accounts are not taxable unless as part of a business trading activity. Buying and selling investments however, which includes cryptocurrency, are not exempt and continue to be subject to Capital Gains Tax (unless the scale of the activity is large enough to amount to a trade – and therefore income tax).
The result is a paper gain for UK tax purposes, even if there is no increase in value of the asset. Taxpayers in the UK are often caught out in this scenario – for example if they invested in an asset for $100,000 when the Dollar was weaker against Sterling, and sold the same asset for $100,000 to reinvest in a new asset – at a time when the currency has strengthened.
In that scenario, the taxpayer triggers a gain in Sterling which is potentially taxable in the UK, without having made any local currency profit. The result – a UK tax bill to fund, which requires the Dollar to be repatriated to the UK (instead of reinvested) unless the money to pay the UK tax can be found elsewhere, or the taxpayer is lucky enough to benefit from the remittance basis of tax.
From a planning point of view, taxpayers should therefore be careful when selling assets with significant currency gains to understand what the tax consequences might be – and whether there are opportunities to mitigate the tax through further capital planning, preferably within the same UK tax year.
Currency can be complicated – and for business owners importing and exporting their goods and services, currency movements are fundamental to their business results. If you have unrealised gains or losses on assets or debts and are unsure of the tax consequences, get in touch with Nick Latimer or your usual Crowe contact.
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