Where individuals, trustees or personal representatives hold a bank account in a foreign currency they are potentially subject to capital gains each time a withdrawal is made from the account.  Calculating the gains (or losses) can be complex and time consuming and, because of this, the Government proposes to exempt such gains from CGT from 6 April 2012.

Baker Tilly analysis

In an increasingly global world, it is not uncommon for UK resident individuals to hold bank accounts in a foreign currency, perhaps because they are paid in a foreign currency, have sold an overseas asset or have specifically invested in currency.

Each movement in and out of a foreign currency bank account (FCBA) is a purchase and disposal for capital gains tax (CGT) purposes. While an exemption is available where the account is for personal use, many are still caught and with the need to consider all movements in and out of the account the calculation can be complex often with the result of no significant gains.  As such, the exemption is welcome.

In detail

Bank accounts are specifically exempt from capital gains tax, except where they are in a foreign currency. While there is a limited exemption for foreign bank accounts for personal use or for running a home overseas, many individuals have bank accounts in a foreign currency for a variety of other reasons. These are potentially subject to capital gains tax each time a withdrawal is made, with the need to look back at each acquisition (i.e. deposit into the account). This can be time consuming and therefore costly for the taxpayer and often the result is that there is minimal or no capital gain arising.

The proposed extension of the exemption for bank accounts to those in a foreign currency is therefore welcome. With an increasingly international presence in the UK, many individuals retain funds in overseas currencies and removing the burden of calculating the CGT position for little or no benefit to the Government’s tax take is a sensible step.

There are no transitional rules, so individuals who currently have FCBAs will need to make an investment decision on realising any gain before the new rules come in, or wait until after 6 April by which time the foreign currency may have fallen in value. Of course, realising any losses now could also be useful planning rather than waiting until the loss would be exempt.