Clause 35 relates to capital gains tax on withdrawals of money from foreign bank accounts. It is not uncommon for individuals resident in the UK to hold bank accounts in a foreign currency, perhaps because they have been paid in that currency, have sold an overseas asset or have specifically invested in a foreign currency. Normally, foreign bank accounts would be chargeable assets for the purpose of capital gains tax. However, under clause 35 gains made on withdrawals will not be liable to tax with effect from 6 April 2012. The measure is expected to decrease remits to the Exchequer by around £5 million a year. It is not expected to affect many individuals according to the impact note, only those who hold a foreign bank account.
Although non-domiciles taxed on a remittance basis are likely to be more severely affected as they are likely to use more foreign bank accounts, the aim behind the clause is clearly to reduce the administrative burden. Calculating gains or losses on such bank accounts can be time consuming and complex. Moreover, over time capital gains and losses on such transactions tend to broadly balance each other out meaning that in many cases the administrative burden is disproportionate to the tax payable or losses allowable. It is, however, possible to envisage a situation where individuals choose to make withdrawals from their account at particular times in order to secure large net gains which would now not be liable to tax. Has the Minister explored that risk? If so, what are his conclusions?
Is it not the case that the measure could contribute to another form of tax avoidance. Another question relates to the losses that would otherwise be used to set against tax liabilities. Has the Treasury given any consideration to the potential impact on individuals who might be affected by this, particularly if they were to suffer significant unexpected losses with money held in a foreign bank account if there was, for example, an unexpected economic downturn?
I was most surprised by the information my hon. Friend just provided. Perhaps she could help me by clarifying this. I have not been diligent enough in understanding the implications of this clause. Would the clause mean that if I kept money in euros, I might have a tax advantage over those keeping money in sterling, in some scenarios? Is that what is being proposed?
Mr Sheridan, may I say what a pleasure it is to serve under your chairmanship?
May I give some financial advice to the hon. Member for Bassetlaw? If he has money in euros, he needs his head examined.
I am grateful for the interesting query from my hon. Friend the Member for Bassetlaw and the useful financial advice provided. I would be interested to know what assessment the Minister has made regarding potential gains and losses to the Exchequer from the changes. Have some of the more unexpected consequences of the proposed change been explored in more detail?
Clause 35 will simplify the capital gains tax rules on foreign currency bank accounts. It takes the gains and losses on bank accounts in a foreign currency out of a charge to tax. It will relieve people from a considerable administrative burden that, in many cases, is disproportionate to the amount of tax involved.
Under the current capital gains tax rules, capital gains and losses can arise on bank accounts in any foreign currency. That is because CGT calculations must be done in sterling. Therefore, if someone holds a bank account in, say, euros, and the exchange rate between sterling and the euro moves up or down after money is paid into the account, the account holder will realise a gain or loss each time they make a withdrawal from the account. That means that people have to keep detailed records of each and every transaction on their foreign currency bank accounts. They must work out the sterling value of funds that they put into the account and the sterling value of funds that they take out of the account, and work out the gain or loss on each withdrawal. The burden of keeping such detailed records and working out gains and losses on each withdrawal is excessive, especially as gains or losses on small withdrawals are likely to be trivial, and over time the gains and losses will tend to balance out. Existing rules may relieve people of that burden where the account is used for personal expenditure abroad. Also, HMRC allows people to adopt a simplified approach to their calculations in some instances. However, those relaxations do not always apply and offer only limited help.
Clause 35 will remove the excessive burdens by taking foreign currency bank accounts out of the scope of CGT for individuals, trustees and personal representatives. That will mean that they will not need to calculate capital gains and losses on the withdrawals made from such accounts on or after 6 April 2012.
The change was included in last year’s consultation on the taxation of non-domiciled individuals. Non-domiciles are more likely than most people to hold bank accounts in a foreign currency and to face the burdens the current rules impose. However, the new exemption applies to all individuals, whether UK domiciled or not. Following consultation, we are extending the exemption to trustees and personal representatives of deceased persons.
The hon. Member for Newcastle upon Tyne North asked whether the proposal would open up an opportunity for avoidance and whether a loophole would be created. The answer is no, because there are existing safeguards in CGT rules that prevent abuse, for instance by stopping relief for artificial losses. Other types of currency assets, such as currency futures or options, are not eligible for the exemption.
I reassure the hon. Member for Bassetlaw that there are no tax advantages in holding euros; he can rest easy on that point. No CGT is due on bank accounts in sterling, and the measure will apply the same rules consistently to other currencies.
With that clarification, I hope that the Committee will be satisfied with the clause, which has been widely welcomed. It is worth pointing out that Deloitte has said that the clause will remove
“a frankly impossible compliance burden from unrepresented taxpayers”,
and the Chartered Institute of Taxation regards the clause as
“a victory for common sense”.
I hope that the clause will stand part of the Bill.