People receiving an income in US dollars or euros before converting it to sterling may be hit by capital gains tax, according to Deloitte.
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.
Jon Croxford, director of private client service at Deloitte in Birmingham, 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 May 1 2008, for the sum of €200,000, when the exchange rate was €1.28 to the £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 January 31 2009, when the exchange rate was €1.13 to the £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 Mr Croxford.
“Interestingly, expenditure for these purposes includes that spent on the provision and maintenance of any residence outside the UK.”