Capital Gain or Foreign Exchange Gain?
OK - this is doing my head in!
Client wants to buy US$140K of shares in July 2008 - GBP equivalent of £70K is deducted from his bank account the same day. His account with his overseas broker is credited with US$140K prior to the purchase.
Client sells all these shares in March 2009 - for US$140K. Sum of US$140K is credited to broker account that same day. However, the money is not transferred to the UK bank account until May 2009, when he receives a sterling equivalent of £91K.
Now - my initial treatment of this is to use the exchange rates on the date the shares are acquired/disposed. While the acquisition is the same (because the money left the UK account the same day as he bought the shares), the disposal amounts will be different (as the date the money received in the UK was later than the date the disposal took place). The GBP equivalent of the US$140K on the date of disposal is £97K. This therefore gave me a gain in 2008/09 of £27K (being £97K less £70K), with an exchange rate loss of £6K in 2009/10. Not ideal - as I can't use the loss!
Therefore, can I argue that the "gain" doesn't happen until 2009/10. By that I mean the purchase and disposal of the shares took place in US$, and thus US$140K less US$140K is nil. He buys for US$140K and sells at the very same price. The only time the client actually makes a "gain" of any kind is when he decides to bring the cash back on conversion, which amounts to £21K (being £91K less £70K), and thus all taxable in 2009/10 as a foreign exchange gain? If that's possible, how do I show the disposal of the shares on the 2008/09 Return, without doing the currency conversion which, after all, will give me a gain that I don't want!
Any thoughts? Hope I haven't lost you!
And I thought I was pedantic!
But Terry is 100% correct in his analysis - I just chose to ignore the transactions that, in this case, can be disregarded in computing the gains/losses (but perhaps not disregarded for reporting purposes)
No allowable loss on withdrawal from broker's account?
I'm happy to be corrected, but at first sight it would appear that there will be no allowable loss arising on the withdrawal of the dollar funds from the from the broker's account.
When the shares are sold, the client does not acquire any foreign currency, rather he acquires a debt owing from the broker (which happens to be denominated in dollars) Section 251 TCGA92 provides that such a debt does not represent a chargeable asset in the hands of the original creditor (in this case, the client). Neither a chargeable gain nor an allowable loss will arise when the sum is repaid.
Section 252 does provide an exception to this where the debt is a foreign currency bank account, but on the face of it a broker's account would not fall within this provision.
David
Two disposals
As in your 4th paragraph. Yes, you have a loss on the 'sale of currency' arising in the following year, but that may simply be too bad - if the taxpayer is an individual. If it is a company then it will have a loan relationship debit, which may be of more use.