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HMRC internal manual

Capital Gains Manual

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HM Revenue & Customs
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Foreign currency: foreign currency bank accounts: treatment of withdrawals and debits - periods up to 5 April 2012

The debt represented by a credit balance in a bank account is a single asset for chargeable gains purposes. Sums credited to the account enhance the asset and increase its allowable cost and each withdrawal or debit from the account is a disposal or part-disposal of the asset. This raises the question of the amount allowable as a deduction from the proceeds of each disposal or part-disposal. The normal rules at TCGA92/S42 apply, see CG12731. Part of the expenditure allowable in respect of the asset immediately before the disposal is apportioned to the asset disposed of according to the fraction A/(A+B) where A is the disposal consideration (the sterling value of the amount withdrawn or debited, computed using the exchange rate at the date of disposal ie withdrawal) and B is the sterling value of the part retained (computed using the same exchange rate).

The expenditure allowable in respect of the asset immediately before the disposal will be the total of the credits to the account expressed in sterling using the exchange rates at the times of the credits, less any amounts allowed as deductions on previous disposals.

Example

A bank account denominated in euros is opened in May with a deposit of €1000. There is a further deposit of €400 in June and a withdrawal of €600 in October. Assume TCGA92/S252(2) does not apply. The exchange rates are

At the time of the May deposit £1 = €1.11
   
At the time of the June Deposit £1 = €1.30
At the time of the October withdrawal £1 = €1.38

There is a part-disposal of the asset (the debt) in October. The computation of the gain or loss is as follows.

Cost of the asset before the disposal =

(€1000 / 1.11) + (€400 / 1.30) = 901 + £308 = £1209

Cost of the part disposed of, computed using the A/(A+B) formula (see CG12731):

A = €600 / 1.38 = £435

B = €800 / 1.38 = £580

A/(A+B) = 435/1015 = 0.4286

So the allowable cost of the part disposed of is

£1209 x 0.4286 = £518

In practice a quicker way of arriving at the allowable cost may be to work by reference to the proportion of the funds in the account that have been withdrawn:

£1209 x €600 / €1400 = 518

The computation of the gain or loss on the withdrawal from the account will be:

Proceeds (€600 / 1.38) £435
     
Allowable cost (as above) £518
Loss   £83

The allowable cost of the remaining asset (the €800 balance of the account) will be:

£1209 - £518 = £691.