CFM64180 - Foreign exchange: accounts drawn up in a foreign currency: capital gains

CTA10/S9C

The basic rule: calculation of chargeable gains in sterling

Capital gains are normally calculated in sterling, following the general principle that, absent specific provision to the contrary, UK tax liabilities are to be computed and settled in sterling. See, for instance, Capcount Trading v Evans, 65 TC 545, see CG78310.

However, there is an exception for holdings of shares, ships and aircraft, where a company subject to CT has a non-sterling functional or designated currency (see below).

The rules in CTA10/S6 to S9, which may permit calculation of tax liabilities in other currencies, do not apply to chargeable gains, as chargeable gains are not calculated in accordance with generally accepted accounting practice.

As a result, where S9C does not apply, gains or losses on chargeable gains assets are calculated by translating into sterling:

  • the original cost of the asset using the spot exchange rate at the acquisition date,
  • any improvement expenditure, acquisition or disposal expenses, at appropriate spot rates, and
  • the disposal proceeds using the spot exchange rate at the date of disposal.

The chargeable gain or loss is then calculated in the normal way using these sterling amounts. The sterling gain or loss is entered on the company return, and any loss carried forward is in sterling.

Application of S9C: Use of functional or designated currency

S9C applies where a company has a “relevant currency” other that sterling and the asset disposed of is a holding of shares, a ship, or an aircraft.

Relevant currency

A company’s relevant company is its functional currency (CFM64110), except in a case where a company has made a valid designated currency election (CFM64500+), in which case it is its designated currency.

Shares, ships and aircraft

In this context a holding of shares takes its meaning from TCGA92/SCH7AC/PARA29 to include interest as a co-owner. Ships and aircraft treated as owned by virtue of a hire purchase or similar contract dealt with under CA01/S67 are included.

Effect of S9C

If the company’s relevant currency is not sterling, the chargeable gain or allowable loss is computed in that currency and translated into sterling by reference to the spot rate of exchange on the date of the disposal.

Expenditure and disposal proceeds denominated in a currency that is not the company’s relevant currency are to be translated into the relevant currency at the spot rate for the date of the transaction.

If there is a change in relevant currency after expenditure is incurred, but before disposal, the expenditure is translated from the currency previously applicable (which will be sterling, or an earlier relevant currency) at a spot rate for the date of the change to the new relevant currency. If there is more than one change, translations are done successively in date order.

If an acquisition is treated as taking place at a value that gives rise to no gain or loss on the person disposing of the asset, or at market value, that value is similarly translated to the relevant currency at the spot rate for the date of the particular transaction.

Transactions prior to 1 September 2013

S9C came into effect with respect to disposals on or after 1 September 2013. Prior to that date there was no special rules for calculating chargeable gains, and as a result chargeable gains were required to be calculated by reference to sterling in all cases.