HMRC Nudge Letter - Foreign Income - How To Respond?

masonic

D924 said:

The tax year in question is 2019/2020 where I disposed of (SOLD) £24k worth of shares but they are inflating it to £69k because apparently currency conversion is considered a disposal so that put me over 4 times the allowance without realising it.

For UK tax purposes, a capital gain should always be calculated using the GBP value of the money used to acquire the investment and the GBP value of the proceeds when the investment is sold. This is not someone "inflating" your gain, that is your actual gain in GBP.

D924 said:

This is basically game over for my life then, I will owe more in fines than my net worth because I will owe a £300 fine for late reporting on every unreported transaction in the year. Is there anything I can do or am I utterly !!!!!!?

That seems a bit overdramatic. You are just late in declaring capital gains that do not carry an actual tax liability. I'm not sure why you think HMRC would fine you £300 for every unreported transaction you made. I'd be surprised if you received any penalty if you act in good faith and explain that you acted as soon as you realised the actual value of your disposals in GBP was very much larger than it appeared in the trading currency. Obviously it is up to you what you do, and you have the option to seek professional advice, but HMRC have already taken an interest in you and I'd have thought getting it resolved pro-actively would be preferable to it being noticed by them and adding another reason they might choose to take a closer look into your activities.

ivormonee

D924 said:

The tax year in question is 2019/2020 where I disposed of (SOLD) £24k worth of shares but they are inflating it to £69k because apparently currency conversion is considered a disposal so that put me over 4 times the allowance without realising it.

This is briefly the account statement:

Sep 2019: Converted £16k to $20k (at 1.2366) - appears on my statement as a disposal of a GBP cash fund at a slight gain.

Feb 2020: Bought $33k (£25.4k at 1.30) worth of stocks - appears on my statement as a (single) disposal

Mar 2020: Sold the same stocks for $27k (£23.5k at exchange rate 1.1492) - five disposals - four losses and one gain in GBP terms

April 2020: Converted funds back to GBP at 1.2353 and withdrew £19k - treated as a disposal and a gain in GBP terms

So that's where they're getting their £68k-ish for calendar year 2020.

Tax year 2019/20 is even worse at £84k worth of "disposals" even though in reality I made an overall loss and there is no tax to pay.

This is basically game over for my life then, I will owe more in fines than my net worth because I will owe a £300 fine for late reporting on every unreported transaction in the year. Is there anything I can do or am I utterly !!!!!!?

Struggling to make sense of this. Within the tax year 2019/20, in GBP terms, you bought £25.4k of stocks, then sold the same stocks for £23.5k, thereby making a small overall loss of about £2k. So no CGT liability. The total stocks sold were £23.5k, so below 4xCGT allowance. I don't believe currency conversion is considered a disposal for CGT unless it's physical cash or business related. But, even if it was, then your gain on that would be £19k - £16k = £3k. Your total gain/ loss would then be -£2k on stocks + £3k on cash = £1k gain overall.
Even if we were to treat the foreign currency convesrion to GBP as a disposal (which I don't think we do as I think you only do that for assets that are chargeable for CGT purposes) the that would still only give rise to a total disposal of £23.5k + £19k = £ 42.5k. This would still be under the 4xCGT allowance.
I think the correct treatment is: CGT gains is a loss of £2k, and total disposals is £23.5k. But even if we look at worst case scenarios, as I've worked out above, you are still within the CGT allowance for taxable gains and within the 4xCGT allowance for having to report.
I'd be interested to see what thoughts anyone else might have on this.

ivormonee

Just to add also, that if the purchase was funded through the disposal of a fund of some sort, ie. the £16k, then that would fall within the scope of CGT as gains would be chargeable. So, adding that into the mix would give rise to a total for disposals of £39.5k, again still within the 4xCGT allowance. I'm just not sure whether converting USD into £19k at the end would be a disposal. It seems more like just converting from one currency to another and would not fall within the scope of CGT. But we need more expert opinions on this so again, would be interested to see other people's thoughts.

masonic

ivormonee said:

I'd be interested to see what thoughts anyone else might have on this.

Foreign currency bank accounts were excepted from giving rise to chargeable gains from 2012/13 onward, but other forms of fx trading can still give rise to capital gains, see https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg78321

The OP is operating an investment account based somewhere in Europe, and given the currency was not acquired in the course of a transaction involving other assets (it was converted up front, then used to trade assets in separate transactions), then the manner in which this European broker operates seems to put it in the category that gives rise to capital gains.

The OP may not have provided a complete list of the transactions required to calculate the total value traded. For example, the Sep 2019 fx transaction was for $20k, but then $33k was used to purchase shares. The other $13k came from somewhere. Unlikely to have been sitting in cash on the platform for 5+ months I would think. Perhaps there were other fx transactions carried out that were unconnected with this disposal of equities. As you say, the origin of the £16k may also be relevant.

I agree with you that from the information provided it is unclear how the OP could have been considered to have traded >4xCGT allowance, even including the fx trades, and perhaps it is for the European broker to give a detailed breakdown of how the £69k was arrived at. A key question may be, when USD or currencies other than the native currency of the broker are held on the platform, are they in cash or some sort of financial instrument which itself is a chargeable asset? The Feb 2020 transaction apparently being a disposal (of USD?) suggests something like this is going on.

ivormonee

masonic said:

ivormonee said:

I'd be interested to see what thoughts anyone else might have on this.

Foreign currency bank accounts were excepted from giving rise to chargeable gains from 2012/13 onward

The OP may not have provided a complete list of the transactions

I agree with you that from the information provided it is unclear how the OP could have been considered to have traded >4xCGT allowance

Yes, there are too many unanswered questions to get a clearer picture. The OP's "statement" I interpreted to be one that s/he received from HMRC (rather than their broker). I say this because of the OP's claims on HMRC's numbers. In other words:

Sept 2019  £16k

Feb 2020   £25.4k

Mar 2020   £23.5k
Apr 2020   £19k

gives a total for "2020" of £67.9k and a total for all four amounts of £83.9k.

The OP states: "that's where they're getting their £68k-ish for calendar year 2020. Tax year 2019/20 is even worse at £84k".

When the OP says "they" I read this to mean HMRC. But something seems a bit odd in that I would not expect HMRC to deal with tax on a calendar year basis. They usually do things on a tax year basis. [edit] I could be interpreting the statement as being from HMRC wrongly. It could well be from the broker as in Europe I think they generally operate on a calendar year basis. [/edit]

What I understood to be the OP's main issue is that they may not have met the requirement to report >4xCGT allowance. As you've said, foreign currency accounts were excepted from CGT gains from 2012/13, but I don't know if it necessarily follows that, if conversion of USD to GBP would still be classed as a "disposal", then in that case we could arrive at £83.9k as above, in which case it could be reportable.

A simpler example. If you do no trades of any assets in a tax year and simply convert USD from your USD bank account into GBP, and the amount you convert >4xCGT allowance, would that then trigger the requirement for reporting? This might help throw a bit more light on the OP's situation.

masonic

Thanks, I'd missed the distinction between calendar year and tax year. I'm pretty sure this breakdown has come from the broker, as the question was whether a pre-emptive (albeit late) declaration should be made to HMRC (given they'll learn of the total via the broker anyway).

The only thing I'm sure of is that I don't want one of these offshore trading accounts!

ivormonee

masonic said:

Thanks, I'd missed the distinction between calendar year and tax year. I'm pretty sure this breakdown has come from the broker, as the question was whether a late declaration should be made to HMRC (given they'll learn of this information via the broker anyway).

The only thing I'm sure of is that I don't want one of these accounts!

On reflection I think you're right. It must have been from the broker. I hadn't quite twigged.
I've tried to research the >4x reporting requirements but can't seem to find anything to explain whether currency converted >4x, in the absence of any other "disposals", would trigger the requirement. Doesn't say anything about this on the self-assessment notes to the CGT pages of the tax return.
Additionally, would any currency converted to GBP have to be added as a disposal to all the "actual" disposals and would this total, combined figure be the one that would need to be compared to the >4x (and be reported if it exceeds it)? If so, then this is what is causing concern for the OP, I think.

masonic

ivormonee said:

masonic said:

Thanks, I'd missed the distinction between calendar year and tax year. I'm pretty sure this breakdown has come from the broker, as the question was whether a late declaration should be made to HMRC (given they'll learn of this information via the broker anyway).

The only thing I'm sure of is that I don't want one of these accounts!

On reflection I think you're right. It must have been from the broker. I hadn't quite twigged.
I've tried to research the >4x reporting requirements but can't seem to find anything to explain whether currency converted >4x, in the absence of any other "disposals", would trigger the requirement. Doesn't say anything about this on the self-assessment notes to the CGT pages of the tax return.
Additionally, would any currency converted to GBP have to be added as a disposal to all the "actual" disposals and would this total, combined figure be the one that would need to be compared to the >4x (and be reported if it exceeds it)? If so, then this is what is causing concern for the OP, I think.

The rules changed around reporting requirements. Unfortunately for the OP it happened after the end of the 2019/20 tax year. From 6th April 2020, someone unregistered for self-assessment only needs to report capital gains if there is tax to pay, even if they trade >4xCGT allowance.

My understanding is that both now and then, currency trades that are not exempted are combined with the total figure for disposal of financial instruments to come to the total. With this broker, it seems from the figures provided that a client is treated as disposing of GBP when converting to USD and disposing of USD when converting to GBP. This could be the result of both currencies being 'foreign' to this broker.

ivormonee

masonic said:

currency trades that are not exempted are combined with the total figure for disposal of financial instruments to come to the total. With this broker, it seems from the figures provided that a client is treated as disposing of GBP when converting to USD and disposing of USD when converting to GBP. This could be the result of both currencies being 'foreign' to this broker.

Thanks for that. Currency trades (meaning, I think, having an account with some sort of fx broker/ dealing platform and opening/ closing positions with the sole aim of making gains) are potentially reportable whereas, conversion of currency between a non GBP account to a GBP account would not form part of the total for >4x. Have I understood this correctly?

If this is the case, then the currency conversions were done, it seems, to facilitate the purchase and subsequent disposal of stock and not, in themselves, traded for a profit. On this basis they would be exempt from being reportable as "disposals" (if my first paragraph is correct).

Also, on reflection, I interpreted the disposal of Sept 2019 as likely to be an actual and legitinate disposal as I think the OP stated it was some sort of cash fund (perhaps a money market fund or something similar). This would be classed as an investment, ie. an asset, so selling it would mean a disposal has taken place.

I am now also wondering that Feb 2020 is potentially a disposal of USD currency as it is being used to buy stock rather than a straightforward conversion to GBP (where paragraph one might apply). I am not sure if HMRC make such a distinction, ie. (i) convert USD to GBP for no other reason other than to hold GBP rather than USD and (ii) convert USD into another asset (in this case stock).

Although the broker is European I am wondering whether they tailor their CGT reports to their customers depending on their residency.

This thread is throwing up more questions as it goes along!

masonic

ivormonee said:

masonic said:

currency trades that are not exempted are combined with the total figure for disposal of financial instruments to come to the total. With this broker, it seems from the figures provided that a client is treated as disposing of GBP when converting to USD and disposing of USD when converting to GBP. This could be the result of both currencies being 'foreign' to this broker.

Thanks for that. Currency trades (meaning, I think, having an account with some sort of fx broker/ dealing platform and opening/ closing positions with the sole aim of making gains) are potentially reportable whereas, conversion of currency between a non GBP account to a GBP account would not form part of the total for >4x. Have I understood this correctly?

If this is the case, then the currency conversions were done, it seems, to facilitate the purchase and subsequent disposal of stock and not, in themselves, traded for a profit. On this basis they would be exempt from being reportable as "disposals" (if my first paragraph is correct).

Where someone is holding foreign currency in a foreign currency bank account, this will not give rise to chargeable gains. If the conversion is taking place as part of a trade of a security priced in a foreign currency, then it would just be the sterling price of the security that is considered for CGT purposes, not any currency conversion itself. That probably covers the vast majority of situations, such as a UK broker that offers multi-currency cash accounts, and those where you trade with automatic conversion to/from GBP.

I don't think someone using a USD cash account to purchase US shares would be treated as making a disposal. I'm sure this would have come up if it was an issue. My best guess is that the OP's broker was not holding the USD in cash in a manner that allowed it to be treated as money in a foreign currency bank account. Nor for the GBP that was treated as a disposal at the point it was withdrawn from the platform. Perhaps the OP was right all along and this is just a quirk of the Common Reporting Standard as applied to this offshore broker. Whatever the explanation, there seems to be little to gain from challenging the figures the platform is using. There is no tax liability, just a missed obligation to declare the volume of disposals.

ivormonee said:

Although the broker is European I am wondering whether they tailor their CGT reports to their customers depending on their residency.

If they are marketing services to UK residents, and reporting to HMRC, as they seem to be, then they'd need to provide tax information to UK clients according to FCA requirements.