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HMRC internal manual

Corporate Finance Manual

Foreign exchange: tax rules on exchange gains and losses: giving effect to exchange differences

No special rules for exchange differences

For the most part, exchange gains and losses are taxable or allowable in accordance with the tax rules that apply to the income, expenditure, asset or liability on which those differences arise. No special tax rules apply in most cases where accounts are drawn up in generally accepted accounting practice.

Loan Relationships and Derivative contracts

In most cases, no special computational rules apply to exchange gains and losses on loan relationships and derivative contracts - the tax treatment will follow the treatment of the underlying asset or liability, and accordingly will be part of the amount brought into account under the loan relationships rules in CTA09/PT5 and PT6 (CFM30000) or under the derivative contracts rules in CTA09/PT7 (CFM70000).

If the gain or loss arises on a loan relationship or derivative contract held for trade purposes, the gain or loss forms part of the trade profit or loss. If it is held for non-trade purposes, it is aggregated with other non-trade credit and debits.

If the debt or contract is held partly for trade purposes and partly for non-trade purposes, or if the purpose changes during the year, the exchange gain or loss should be apportioned in a reasonable manner depending on the underlying facts.

Special rules

You will only need to consider special tax rules for exchange differences where:

  • fair value accounting is used CFM61160; 
  • exchange differences on loan relationships or derivative contracts that are taken to reserves CFM61140; 
  • a loan relationship is between connected parties CFM61130; 
  • exchange differences arise on certain shares (CFM61150);
  • for periods of account beginning before 1 January 2005, only interest and exchange differences arising on creditor loan relationships within FA96/S92 (convertible or exchangeable securities) or asset-linked securities within FA96/S93 come within the loan relationships regime (CFM82000);
  • loan relationships are not on arm’s length terms CFM38400; 
  • for periods beginning before 1 January 2005, the provisions at FA96/SCH9/PARA12 and FA02/SCH26/PARA28 disregarded credits or debits from an intra-group transfer of a loan relationship or derivative contract, but this did not apply to exchange gains or losses - CFM34150; 
  • the unallowable purposes rules for loan relationships (CTA09/S441) and derivative contracts (CTA09/S690) apply CFM38100;
  • exchange gains or losses on liabilities or derivative contracts that are matched with shares (or ships or aircraft) are disregarded CFM62000.