Non-dom capital accounts, forex movements and capital gains
Question:
As res/non dom on remittance basis, I have overseas 'capital' accounts in £, $ & EUR initially funded with capital before I became UK resident. This was invested in bonds and at maturity the principal was paid to the capital a/c while the interest went to an income account. I also switched between currencies.
I have some questions as to what is pure capital for remittance and how capital gains are calculated.
If I started with a capital of 100K, bought a bond at 98, and received the principal at 100 on maturity, I end up with 102k in the capital account.
Q1) Have I actually made a gain of 2'000 for tax purposes? Q2) What does this mean in terms of isolating pure capital for tax-free remittance. In this case, is the balance of the 'capital' account not pure capital.
To complicate matters, what if the currency of the bank account and bond investment is not in £ but $.
Q3) Is the gain calculated based on the $98K invested in the bond at £1=$2,=£49K vs. $100K received at maturity at £1=$1.60, =£62.5K. I.e., a gain in £ of £13.5K, consisting of the FX effect and the price difference between purchase and redemption.
Q4) What does this mean in terms of remitting capital? Is the balance of $102K pure capital, regardless of what is the equivalent of this in £ at the time of remittance? Or is the pure capital that can be remitted tax-free the £ equivalent of the initial $'s converted at the £/$ rate on the date I became resident? How do I separate capital for tax-free remittance from gains? Should I transfer any gains out of the capital a/c to a separate overseas capital gains a/c so that the balance of the capital a/c represents pure capital?
Q5) A related question: in the case of bonds, does the purchase price include everything paid when purchased, i.e. including the market price, plus bank commission/brokerage, plus accrued interest?
Q6) What about transfers between currencies? If I transfer from $ to EUR, is there a gain and how is it calculated? Would this be the difference between the £/$ rate when the transfer is made and the £/$ rate when the funds originally entered the $ a/c in the first place? I have difficulty determining what this starting rate should be since the capital a/c was established before I became resident and was funded from various accounts. Do I use the rate in effect on the date I became UK resident?
Q7) How about capital losses resulting from movements in currency. Can these be offset against gains?
Answer:
Q1) Have I actually made a gain of 2'000 for tax purposes?
It depends on the type of bond. If you were talking about an offshore investment bond special rules apply:
If you're UK resident at the date of the 'disposal' of the bond you'll then be subject to income tax on the gain made under special tax rules. This means that you could be taxed at rates of up to 40% on the gain made (subject to relief).
Another drawback is that if you're UK resident when you sell/encash the bond the remittance basis won't apply even if you're a non dom. (Unlike practically all other overseas assets).
Therefore the £2K 'gain' would be subject to income tax and the £102K in the account would be pure capital.
I'll assume that the bonds weren't investment bonds but were corporate bonds. The £2K would then be a gain for CGT purposes.
Q2) What does this mean in terms of isolating pure capital for tax-free remittance. In this case, is the balance of the 'capital' account not pure capital.
Yes,the account would contain capital of £100K and a gain of £2K. On a remittance of anything from the account is subject to the mixed fund ordering rules. Ie the £2K gain first before the £100K tax free capital.
To complicate matters, what if the currency of the bank account and bond investment is not in £ but $.
Q3) Is the gain calculated based on the $98K invested in the bond at £1=$2,=£49K vs. $100K received at maturity at £1=$1.60, =£62.5K. I.e., a gain in £ of £13.5K, consisting of the FX effect and the price difference between purchase and redemption.
Yes, this is correct.
Q4) What does this mean in terms of remitting capital? Is the balance of $102K pure capital, regardless of what is the equivalent of this in £ at the time of remittance? Or is the pure capital that can be remitted tax-free the £ equivalent of the initial $'s converted at the £/$ rate on the date I became resident? How do I separate capital for tax-free remittance from gains? Should I transfer any gains out of the capital a/c to a separate overseas capital gains a/c so that the balance of the capital a/c represents pure capital?
The balance on the account in the example above would be £$102K or £63.5K. This would be a mixed fund and represent both capital and capital gain. The capital would be £51K and capital gain would be 12.5K (total £63.5K).
Ie
Original capital = $100k = £50K (assumed)
Investment = $98K = £49K
Balance in account = $2K = £1K
Receipt = $100K = £62.5K
Final account balance = $102K =£63.5K
Q5) A related question: in the case of bonds, does the purchase price include everything paid when purchased, i.e. including the market price, plus bank commission/brokerage, plus accrued interest?
It would be the actual cost of purchase plus incidental costs of disposal & acquisition. Accrued interest is dealt with under the accrued interest scheme.
Q6) What about transfers between currencies? If I transfer from $ to EUR, is there a gain and how is it calculated? Would this be the difference between the £/$ rate when the transfer is made and the £/$ rate when the funds originally entered the $ a/c in the first place?
Yes this is correct.See this article: //www.wealthprotectionreport.co.uk/members/Exchange_rates_for_non_doms_based_on_new_guidance_in_2009.cfm
I have difficulty determining what this starting rate should be since the capital a/c was established before I became resident and was funded from various accounts. Do I use the rate in effect on the date I became UK resident? You can use the average rate. See this Q&A for more details:
//www.wealthprotectionreport.co.uk/members/CGT_on_currencies.cfm
Q7) How about capital losses resulting from movements in currency. Can these be offset against gains?
There are special rules just introduced to restrict capital losses from foreign currency. See this article:
You may also be interested in our new Practitioners Membership which (amongst other benefits) will offer access to a special tax forum for detailed tax analysis and more complex questions. To sign up visit:
https://www.wealthprotectionreport.co.uk/public/1481.cfm
del.icio.us
Digg
Reddit
Facebook
StumbleUpon
GoogleBookmark
Technorati
Furl
About the Author
The Author of this article/answer is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.
=============================================================
Disclaimer
=============================================================i) Please note that the articles/answers contain general guidance only and do not constitute accountancy, tax, investment or other professional advice.
ii) The contents of this article/answer are for information only and are intended to assist readers in identify any tax planning opportunities that may be available to them. The information contained in this answer is not intended to be a substitute for taking proper taxation advice and should not be relied upon in this way. Always consult a qualified accountant or taxation adviser. Your situation will then be looked at individually and specific advice relevant to your circumstances can be given. The Expert does not accept responsibility for any loss arising as a result of reliance on any information contained in this answer.
These Notes (and Disclaimer) do not affect your statutory rights in the United Kingdom.