Background Note
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foreign income and that would, if the account holder is taxed on the remittance basis, be charged to income tax if withdrawn and remitted to the UK.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.
