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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: aggregation of debits and credits - for periods up to 5 April 2012

There are often large numbers of transactions on bank accounts. It can be a formidable task to compute gains or losses on numerous withdrawals because each withdrawal is a part-disposal of an asset (the debt represented by the credit balance on the account). Providing it is followed consistently and produces a reasonable overall result, the following practice may be adopted when computing foreign exchange gains and losses on withdrawals from accounts denominated in a currency other than sterling.

The practice involves aggregating debits from and credits to an account over a period. Usually the period of aggregation will be a calendar month, but part of a month will be used at the beginning or end of a tax year, or if the account is opened or closed during the tax year. For these purposes, when the balance on an account becomes negative the account is treated as having been closed because the asset it represents no longer exists, and when an overdrawn account returns to credit it is treated as an account newly opened because an asset - a debt receivable - comes into existence. In what follows we assume the aggregation period is a month.

The foreign exchange gain or loss is computed by taking the consideration as being the total of debits (withdrawals) from the account translated into sterling using the average rate of exchange for the month. The allowable cost to be deducted from this consideration is computed using the part disposal formula A/(A+B) x Total Cost. The Total Cost is the allowable cost of the total foreign currency debt represented by the account at the start of the month (a sterling amount) plus the cost in sterling of credits to the account during the month, derived from the total foreign currency credits translated at the average rate of exchange for the month. In the formula A/(A+B), A is the total withdrawals from the account in the month, expressed in the foreign currency and B is the balance of the account at the start of the month plus the net credits to (or minus the net debits from) the account in the month ie the total credits less the total withdrawals (both in the foreign currency). Note that for these purposes B itself cannot be less than zero because the allowable costs to be deducted would then exceed the Total Cost (the fraction A/(A+B) would be greater than one). In the real world, this would mean the account had become overdrawn: the asset represented by the credit balance would have ceased to exist because it would have been disposed of in full and the part-disposal provisions for apportioning costs would not in fact be applicable.

The allowable cost used in computing the foreign exchange gain is deducted from the Total Cost and the resulting figure carried forward to form the opening base cost of the balance in the account at the start of the next month.

The example at CG78328 illustrates this.

Monthly average exchange rates may be based on daily rates published or made generally available by any reputable organisation. Weighting of daily rates is not acceptable.

Where this practice is adopted it must be used for all accounts in a particular foreign currency and must be used for the whole of a tax year.

NOTE. If a taxpayer is within the charge to Capital Gains Tax, neither indexation allowance nor taper relief apply to disposals of assets on or after 6 April 2008. Previously indexation allowance had been frozen at April 1998. For indexation allowance see CG17207+ and for taper relief see CG17895+.