Section 34 Schedule 9: Foreign Currency Bank Accounts
1.Section 34 and Schedule 9 prevent the interaction of the remittance basis of taxation and certain capital gains tax (CGT) rules from producing allowable capital losses on disposals of amounts in foreign currency bank accounts where there has been no economic loss. The changes were announced in a Ministerial statement on 16 December 2009, and take effect from that date.
Details of the Schedule
2.Paragraphs 1 and 2 of the Schedule together insert a new section 252A and Schedule 8A into the Taxation of Chargeable Gains Act 1992 (TCGA). The new section 252A of TCGA introduces the new Schedule 8A.
3.Paragraph 3 of the Schedule provides that the changes made have effect for disposals on or after 16 December 2009.
Schedule 8A TCGA
4.Paragraph 1 provides the conditions for Schedule 8A to apply. These are that:
an individual makes a “relevant disposal”, a disposal of a debt that is represented by a balance in a bank account denominated in a currency other than sterling (described as a “section 252 debt”);
the bank account is not situated in the UK; and
part or all of the proceeds of the disposal are charged to income tax under the remittance basis as foreign income, and the amount which is liable to income tax (referred to as a “section 37 amount”) is therefore excluded from the consideration taken into account in computing the chargeable capital gain on the disposal of the section 252 debt.
5.Paragraph 2(1) provides that paragraph 2 applies where the whole value of the consideration received for a relevant disposal is excluded from the computation of the chargeable gain or loss arising as a result of that disposal.
6.The relevant disposal may be of the whole balance in the foreign currency bank account, or of part only of that balance. In the latter case, paragraph 2(2) provides that, in applying the rules for determining the expenditure deductible in arriving at the chargeable gain or loss on a part-disposal, the amount to be excluded from the consideration (“the section 37 amount”) is included in the amount of consideration received.
7.This rule has the effect that the whole of the expenditure related to the part of the debt disposed of is included in the computation of the gain or loss on the disposal. As the whole of the consideration received is excluded from the computation, this means that the computation is certain to give rise to a loss.
8.Paragraph 2(3) provides that any loss arising on a disposal to which paragraph 2 applies is not an allowable loss for the purposes of CGT, so that it cannot be deducted from chargeable gains to reduce the individual’s net amount chargeable to CGT. This is the case whether the disposal is of the whole balance in the account or only part of the balance.
9.Paragraph 3(1) provides that paragraph 3 has effect where only part of the value of the consideration for the relevant disposal constitutes a section 37 amount excluded from the consideration used in computing the chargeable gain or loss on the relevant disposal.
10.Paragraphs 3(2) and (3) provide that in this case the relevant disposal is treated for the purposes of the TCGA as two separate disposals, one of the amount of the section 252 debt (“debt A”) in respect of which the section 37 amount is received, and the other in respect of the balance of the amount disposed of (“debt B”).
11.Sub-paragraphs (4) to (9) of paragraph 3 provide rules for computing the chargeable gain or loss arising on these separate disposals of debt A and debt B.
12.Sub-paragraph (5) provides that the consideration for the relevant disposal is allocated between the deemed disposals of debt A and debt B so that the section 37 amount is allocated to debt A and the balance to debt B.
13.Sub-paragraph (6) provides for the case where the relevant disposal is of the whole of the section 252 debt. The allowable expenditure is allocated between debt A and debt B pro rata to the division of the disposal consideration made under sub-paragraph (5).
14.Sub-paragraphs (7) to (9) provide for the case where the relevant disposal is of part only of the section 252 debt. In this case, the total allowable expenditure in respect of the section 252 debt is allocated among debt A, debt B, and the balance of the section 252 debt not disposed of in proportion to their respective amounts. Incidental costs of the disposal are allocated between debt A and debt B in proportion to the amounts of those debts.
15.The result of the apportionments provided for in sub-paragraph (6) or in sub-paragraphs (7) to (9) is that in computing the TCGA consequences of the deemed disposal of debt A, the consideration will be nil, because the section 37 amount is the entire consideration. The expenditure relevant to debt A will be deductible, so that there is certain to be a loss. Paragraph 3(10) provides that this loss is not an allowable loss for CGT purposes. Any gain on the disposal of debt B remains chargeable, and if a loss arises on that disposal it is allowable provided that the proper notice is given in accordance with section 16(2A) of TCGA.
16.Paragraph 4 of Schedule 8A provides interpretation for various terms used in that Schedule.
17.This section and Schedule prevent the interaction of the CGT rules and the rules for the remittance basis of taxation from resulting in allowable losses for CGT purposes that do not reflect economic losses.
18.The remittance basis is an alternative tax treatment under which the foreign income of an individual who is not domiciled, or not ordinarily resident, in the United Kingdom is not charged to income tax until it is remitted to the UK.
19.Since a credit balance in a foreign currency bank account (FCBA) is an asset for CGT purposes, a withdrawal, or other disposal, of all or part of such a balance can give rise to a chargeable gain or loss. This gain or loss arises as a result of changes in the sterling rate of exchange with the foreign currency during the period that the foreign currency amount in question is in the FCBA.
20.The TCGA contains rules that prevent the same receipt being taken into account for both income tax and CGT purposes. Section 37 of TCGA (from which the reference in Schedule 8A to a “section 37 amount” derives) has the effect that a receipt that is taken into account for income tax purposes is not included in the figure of consideration received used for computing a gain for CGT purposes. There is a similar rule at section 39 in respect of expenditure to prevent the same sum being deducted for both income tax and CGT purposes.
21.An FCBA may include sums that represent foreign income and that would, if the account holder is taxed on the remittance basis, be charged to income tax if withdrawn and remitted to the UK. If there were a withdrawal and remittance of such a sum, the amount chargeable to income tax under the remittance basis would be excluded from the consideration taken into account in computing any chargeable gain or loss arising as a result of the withdrawal of the foreign currency amount.
22.However, there is no corresponding adjustment of the allowable expenditure for CGT purposes, because the “cost” of the foreign currency balance in the FCBA is not deducted or taken into account for income tax purposes. The result of excluding the section 37 amount from the figure of consideration received, while not reducing the allowable expenditure, is that a loss may arise because the cost is allowable but the corresponding receipt is excluded from the computation.
23.Schedule 8A therefore amends the rules for computing the chargeable gain or loss in relation to a balance in an FCBA where section 37 applies because of the operation of the remittance basis. The effect of the Schedule is that the costs of the foreign currency balance that gives rise to the section 37 amount are prevented from producing an allowable loss for CGT purposes.
24.The intention to introduce this legislation was announced by the Financial Secretary to the Treasury in a written statement on 16 December 2009. On 23 December 2009 HM Revenue & Customs (HMRC) issued a technical note explaining in more detail how the new rules operate. That technical note, which includes a copy of the Minister’s statement of 16 December 2009, is on the HMRC website at http://www.hmrc.gov.uk/cnr/fcba-technical-note.pdf.