GIM5270 - Taxation of the investment return: investment gains: portfolio assets: exchange differences

The FA 1993 legislation on foreign exchange gains and losses (‘Forex’) applies to exchange differences on qualifying assets. Under FA93/S153 an equity shareholding was a qualifying asset if held in qualifying circumstances. Those circumstances are that

• if the company were to transfer the asset, the profit or loss would fall to be treated for tax purposes as a trading item, and
• if the asset were held at the end of the accounting period, it would fall to be valued, in the company’s accounts, at an amount which represents the translation, at closing rate, of the foreign currency value of the asset, whether that value was itself determined at the balance sheet date, at the date of acquisition, or at some intermediate date.

Insurers' holdings of foreign currency denominated shares that are not regarded as structural assets satisfy these tests. However under regulation 3 of the Exchange Gains and Losses (Insurance Companies) Regulations 1994 (SI1994/3231) ("the Insurance Regulations") an exchange gain or loss under the Forex legislation on a qualifying asset which is a share is to be taken not to accrue. It is therefore disregarded for tax purposes. FA93/S128 (11) is also disapplied in relation to such assets. This section normally prevents an exchange gain or loss that arises otherwise than by virtue of the Forex legislation from being recognised for tax.

The consequence of the exclusion of insurance companies' shares from the Forex legislation was that exchange differences on these assets fell to be taxed in accordance with the general rules relating to the computation of trade profits. At the time these were thought to require exchange gains and losses to be brought into account only on realisation of the asset. However, no objection was taken if a company recognised exchange differences for tax purposes on a translation basis, provided it was done consistently. In particular, those companies that were already using a full translation basis prior to 1993 may well have found it convenient to continue to do so.

For accounting periods beginning on or after 1 October 2002, regulation 3 SI1994/3231 is revoked. Exchange differences on shares denominated in a foreign currency (or a currency which is not the accounting currency of the company) will be brought into account as trading receipts or expenses in accordance with their treatment in the accounts under UK GAAP (SSAP 20). This applies where the realisation basis is retained by election under FA02/S66.