January 27th 2017

Whenever the Brexit vote result in the UK leaving the EU, it has already caused the pound to slide against other currencies. But if you decide to sell foreign assets to take advantage of this, how will your tax position be affected? Alan Simpson takes a closer look.

Alan Simpson, Associate, JRW Chartered Accountants
Alan Simpson, Associate, JRW Chartered Accountants

Foreign assets 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, e.g. transferring money from a US dollar account to a sterling account, counted as sales and purchases as assets for CGT purposes. Since then personal currency transactions are not subject to CGT, however, there can still be tax consequences where foreign currency is acquired and used in your business.

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.

In 2005 Mark bought a property in the USA for $200,000. He used £109,000 sterling to make the purchase. Mark wants to sell the property which is now worth $250,000. That’s an increase in value of just 25%, but its value in sterling at December 2016 rates is almost £200,000. That’s a gain of around 46%. 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.
It doesn’t matter if Mark converts the proceeds from the sale into pounds or not, 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.

In 2003 John bought shares in a Spanish company for €20,000. He sold them in December 2016 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 2016/17 he wouldn’t have to declare it because it’s covered by his exemption.
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.

As you can see all capital gains calculations must be worked out in sterling. That means any exchange rate fluctuations will increase or decrease the gain or loss you make on the sale of a foreign asset. Don’t forget to make a claim on your tax return where a rising pound creates a loss on the sale of a foreign asset.

As ever if you would like help or advice regarding the best approach to take in your circumstances, please do not hesitate to contact one of the team at JRW who will be happy to help.

JRW Chartered accountants in Edinburgh, Galashiels, Hawick, Langholm and Peebles.