This part of GOV.UK is being rebuilt – find out what beta means

HMRC internal manual

Corporate Finance Manual

Foreign exchange: matching: anti-avoidance: ‘one-way bet’ schemes: example

Forex one way bets: example

A straightforward example of a dual currency loan scheme involves a parent company (‘Plc’) and a subsidiary (‘HoldCo’), both UK resident and accounting in sterling. HoldCo holds shares in a US subsidiary. The resultant US dollar exposure is hedged by Plc borrowing dollars from external sources under a straightforward loan. The borrowed cash is on-lent to HoldCo.

This would be a normal commercial arrangement. However, the loan from Plc to Holdco has an unusual term - when it falls due for repayment, Holdco may decide whether to repay it in sterling or in US dollars. The making of the loan and its repayment occur within the same period of account.

If the dollar weakens, Holdco does not exercise its option to repay in sterling, and it is treated in the accounts of both companies as a US dollar loan. If, however, the dollar strengthens, Holdco repays the loan in sterling, and both companies account for it as a sterling loan. The table below sets out the tax consequences:

Scenario Tax effect in Plc Tax effect in Holdco
US dollar weakens Exchange gain arises on external borrowing.  

Exchange loss arises on ($) loan to Holdco.

No net gain or loss for tax purposes. Exchange gain arises on ($) loan from Plc.

Exchange loss arises on shares in US subsdiary.

The exchange gain on the loan is matched for tax purposes, and is not brought into account.    
  US dollar strengthens Exchange loss arises on external borrowing, which is claimed as allowable for tax.
Loan to Holdco is in sterling, so no exchange differences. Loan from Plc is in sterling, so no exchange differences.

Exchange gain arises on shares, but is not taxable.

Overall, no gain or loss for tax.

Thus the purported effect of the scheme is to give Plc a tax effective exchange loss if the dollar strengthens, but for the company to be ‘flat’ if the dollar weakens. There is no economic or taxable gain or loss in HoldCo under either scenario.