Foreign currency considerations

Overview of foreign income taxation

Foreign currency considerations

There are special rules that must be considered when buying and selling assets in foreign currency. This is sometimes known as a barter transaction. As a general rule when a foreign currency transaction takes place at arm’s length, the value of the consideration is the sterling equivalent of the amount paid for the asset at the date of acquisition and / or disposal.

HMRC provides the following explanatory example where US shares are bought for US dollars in a bargain at arm’s length for full consideration:

  • the acquisition cost of the shares is the sterling equivalent of the dollars given at the exchange rate in force at the date of acquisition of the shares;
  • the consideration for disposal of the dollars is the sterling value of the shares received in exchange.

HMRC supported by case law, will not accept that the gain or loss on an asset acquired and disposed of for foreign currency should itself be computed in foreign currency, and then converted into sterling at the rate ruling at the time of the disposal of the asset. These rules can create unusual scenarios where a profit or loss in a foreign currency transaction due to currency movements, can create a significantly different outcome when the values are converted to sterling.

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