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Where Taxpayers and Advisers Meet

Foreign currency broker account - chargeable or not?

mavrik
Posts: 5
Joined: Mon Jul 11, 2016 7:49 pm

Foreign currency broker account - chargeable or not?

Postby mavrik » Thu Dec 06, 2018 3:54 pm

Hi all,

I'm UK resident and domiciled. I have a US dollar brokerage account which I use to purchase or sell US-listed option about once or twice a month. I don't trade forex. I'm aware that each purchase and sale needs to be converted into sterling separately first before calculating the gain/loss and also that interest received on the cash balance in the account should be converted into sterling and separately declared. I do have a couple of queries though:

1. For the exchange rate should I use the monthly average rates from the HMRC site or the daily spot rates from the Bank of England site. If the latter, would it be reasonable to use the nearest previous day's rate for trades that occur on days that have no published rate?

2. Do I need to calculate gains/losses on the cash balance of the account that arise due to foreign exchange movements. I've read CG78300 and sections 251 and 252 TCGA as amended in 2012 but I'm still not clear. The act states that for simple debts and foreign currency bank accounts there is no chargeable gain. The manual indicates that buying/selling shares results in the acquisition/disposal of currency which is chargeable. I also found the following tax guide (https://www.icaew.com/-/media/corporate/archive/files/technical/tax/tax-news/taxguides/taxguide-4-11-foreign-currency-issues.ashx). If I understand it correctly, paragraph 39 suggests foreign currency held in a simple execution-only brokerage account would be a debt which is not chargeable, but funds invested with a fund manager may be chargeable depending on how it is structured.

Can anyone confirm either way? I'm trying to get advice from HMRC but have had little luck getting through so far.

Thanks

bd6759
Posts: 2924
Joined: Sat Feb 01, 2014 3:26 pm

Re: Foreign currency broker account - chargeable or not?

Postby bd6759 » Sat Dec 08, 2018 11:30 am

1. The spot rate should be used. It would be reasonable to use the either the day before.

2. You only make a gain/loss when you make a disposal.

mavrik
Posts: 5
Joined: Mon Jul 11, 2016 7:49 pm

Re: Foreign currency broker account - chargeable or not?

Postby mavrik » Mon Dec 10, 2018 2:26 pm

Thanks. I'll use the spot rates.

I wasn't quite clear on the second bit. I will calculate a gain/loss for each disposal of an option but are purchases of options (shares, etc) in the account considered to be disposals of US dollars and sales of options (shares, etc) considered acquisitions of US dollars, with the dollar balance itself being treated as a chargeable asset, if you see what I mean.

E.g. I fund an account with £10,000 on 6 April and convert the entire balance to US dollars at an actual exchange rate of say 1.3 so I have a balance of $13,000. On 1 May I purchase an option for $5,000 (spot rate 1.27) and my cash balance in the account drops to $8,000. On 10 July I sell the option for $6,000 for a nominal profit of $1,000 so cash balance is now up to $14,000 (spot rate 1.31). The account continues to be maintained in US dollars indefinitely. What are the relevant figures to declare to the tax man?

For the option: acquisition cost is $5,000/1.27 = £3,937. Disposal proceeds $6,000/1.31 = £4,580. Computation of gain/loss = £4,580-£3,937=£643 gain.

So far so good.

But the balance of funds in the brokerage account is now $14,000. If this was treated like a foreign currency bank account or debt I, If I understand correctly, there is no further gain/loss beyond the £643 gain to compute, even when I eventually convert part or all of this back to sterling. On the other hand, if the dollar funds are treated as a chargeable asset, the purchase of an option on 1 May is a disposal of US dollars and the sale of the option on 10 July an acquisition of US dollars as per the calculations below, giving rise to a further £91 gain to be declared for this tax year with further gains/losses to be computed in the future. I wasn't sure which method of calculation would be correct; in this simple case, the results are pretty much the same allowing for rounding, but in real life I have monthly dollar interest paid on the balance and the several transactions would fall under same day or 30 day matching rules.

Part disposal method:
Cost of dollars prior to disposal - $13,000/1.3 = £10,000
On 1 May, dispose $5,000 by purchasing option: A = $5,000/1.27 = £3,937. (B = $13,000 - $5,000)/1.27 = £6,299. A/(A+B) = £3,937/£10,236 = 0.3846
Allowable cost of disposal = 0.3846 x £10,000 = £3,846
Computation of gain/loss = disposal proceeds £3,937 - allowable cost £3,846 = £91 gain.
Allowable cost of remaining balance = £10,000 - £3,846 = £6,154.
On 10 July, acquire $6,000 by selling option: £6,154 + $6,000/1.31 = £6,154 + £4,580 = £10,734 is the cost of acquisition of $14,000 going forward.

Share identification rules method:
Section 104 holding of dollars = $13,000/1.3 = £10,000
On 1 May, dispose $5,000 by purchasing option: Disposable proceeds = $5,000/1.27 = £3,937. Acquisition cost = $5,000/$13,000 x £10,000 = £3,846. Computation of gain/loss = £3,937-£3,846 = £91 gain.
Section 104 holding carried forward now comprises $8,000 with acquisition cost of £6,153.
On 10 July, acquire $6,000 by selling option: £6,153 + $6,000/1.31 = £6,153 + £4,580 = £10,733 is the acquisition cost of the section 104 holding of dollars going forward.

bd6759
Posts: 2924
Joined: Sat Feb 01, 2014 3:26 pm

Re: Foreign currency broker account - chargeable or not?

Postby bd6759 » Wed Dec 12, 2018 12:53 am

You buy an option for the sterling value of $5000. (£3,937)
You sell the option for sterling value of $6000. (£4,580)
The difference is your gain. (£643)
It is as simple as that.

mavrik
Posts: 5
Joined: Mon Jul 11, 2016 7:49 pm

Re: Foreign currency broker account - chargeable or not?

Postby mavrik » Wed Dec 12, 2018 1:16 am

Thanks again. So when I eventually convert the entire $14,000 balance back into sterling, say at a rate of 1.25, I can transfer £11,200 back to the UK with no further gain/loss calculations beyond the initial £643 gain on the option sale. That certainly makes things a lot simpler.

mavrik
Posts: 5
Joined: Mon Jul 11, 2016 7:49 pm

Re: Foreign currency broker account - chargeable or not?

Postby mavrik » Thu Dec 13, 2018 4:21 pm

A quick update. I finally had a call back from a technical advisor at HMRC. She confirmed the advice given here that I could use daily spot rates and the closest day's rates if no rates were published for the day. However, she also advised me that I should treat option acquisitions as dollar disposals and options sales as dollar acquisitions. She told me I could use either the part disposal method or section 104 holding rules for the calculation of the gains losses on the dollars, as I saw fit, which seemed a little strange. Finally, she told me to put all the figures on the foreign income page and not the capital gains summary but looking at the forms now I don't see any relevant boxes on SA106 and the guidance notes for SA106 instruct me to use the capital gains summary pages for capital gains from the disposal of overseas assets.

I was really hoping she would just confirm bd6759's understanding on the treatment of the dollars, which I've also since seen repeated in a few other places, but unfortunately she did not. I'm not satisfied that she really understood the query fully but I don't think I can entirely ignore her advice. I will probably have to write to HMRC formally for a definitive answer. In the meantime, as we are close to the SA deadline I will just file my return following bd6759's view and amend as necessary depending on if HMRC reply. The net effect should only be to increase or decrease the level of capital losses carried forward from this tax year anyway; I'll be able to amend before using those losses in next year's return.


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