The dramatic change in the value of the euro has all manner of implications – including tax. It should be remembered that foreign currency other than sterling is a chargeable asset for capital gains tax purposes under Section 21 TCGA 1992, so a charge to capital gains tax could inadvertently arise.
For example, a non-dom could have carefully arranged to maintain capital and income accounts outside the United Kingdom, ensuring that the capital account contains only principal and all income is paid directly to another account. Remittances are made only from the capital account, which are not, of course, chargeable to tax in the United Kingdom. Well, maybe not chargeable. If the capital account is in euros, a transfer to the United Kingdom and conversion to sterling could well give rise to a significant capital gain that would be immediately taxable.
The position could be worse with a foreign property. A property purchased in Europe for €500,000 (and with a €500,000 mortgage) may have been acquired when the euro was at £1.50. If the property is now sold for the same price, and the mortgage discharged, at a time when the euro is standing at £1.10, the sterling equivalent of the sale price would give rise to a profit of £121,000. The mortgage will be £121,000 more as well, so in net terms, everything balances. Unfortunately, however, the gain on the property is chargeable to capital gains tax, whereas the loss on the mortgage is not an allowable loss. Losses arise only on the disposal of assets, and a liability (even in euros) is not an asset.
It would not matter whether the sale proceeds were ever converted into sterling; it is the disposal of the property that represents the chargeable disposal for capital gains tax on which the gain will arise. To make matters worse, if there is a delay between selling the property and discharging the mortgage and the euro strengthens during that period, a further gain might arise. For example, the property might be sold when the euro is standing at £1.10 and the sale proceeds are £454,500. If the proceeds are placed on deposit and the euro strengthens to parity with the pound before the mortgage is paid off, the disposal of the euros in discharge of the mortgage will give rise to an exchange gain of £46,000. Similarly, with the cruellest of ironies, if any of the euros are used to pay the capital gains tax, that would also give rise to a disposal of the euros and this could rise to a further charge to capital gains tax.
Non-doms who are subject to the remittance basis will need to bear this point in mind in deciding whether to pay the £30,000 non-dom charge. Although the gain arising outside the United Kingdom would be taxable only if remitted, it cannot be overlooked in the calculation.