CGT on US share sale

[y0rkiebar]

Hi,

I have a number of shares in a US company. I'm looking to sell a chunk to use up the £6K CGT allowance in the 2023/4 tax year.

The shares are held within a US Schwab account and when I sell the chunk of shares then the proceeds will move to the $ cash "pot" within the Schwab account.

At some time following the sale I will transfer the $ amount to a UK bank account using a currency transfer outfit (probably Wise).

My question is on how to calculate the gain which will result from the share sale. I have the $ purchase price and have converted that to a £ amount.
But, which "sale" value should I use ?

1) The $ sell price from Schwab converted to £ (with the $ amount still sitting in the Schwab acount).
or
2) The £ amount which hits my UK bank account after the Wise transfer has taken place from the Schwab $ sale pot.

That's my conundrum.

[scrumpyjack]

AFAIW the purchase cost would be converted at the rate applicable when the shares were acquired. The sale would use the rate at the date of sale.
If the proceeds were converted and remitted promptly and there had not been a material currency movement, I doubt HMRC would mind you using the sterling proceeds.

[gryffron]

Yes, the rules say price and exchange rate on date of sale.

However, as part of your “investment” activities, you should also pay/reclaim any gain/loss on the currency trade too. I.e. the difference between the rate when you acquired the USD and the rate when you converted them.

So in effect, you would simply combine these two taxable gains if, as scrumypjack suggests, you used the actual UK remittance as your sale proceeds.

Gryff

[y0rkiebar]

Thanks both.

[1nvest]

As per https://www.gov.uk/hmrc-internal-manual ... l/cg78300p you report share gains in £, that include any FX gain/loss element.

I use ii, within which you can convert £ to $ and then trade in/out of US$ assets (stocks) repeatedly, and then later convert back the $ to £ whenever. [Note that this is a general account, not a ISA account - that doesn't permit you to hold foreign currencies, but equally are tax exempt so you don't have to bother with reporting gains/losses].

That involves £/$ gain/loss and shares gain/loss. For the shares you (mathematically) convert the gain/loss as though you'd bought and sold the shares in £'s i.e. the £/$ FX rates at the time of buying and selling the shares. For the FX gain/loss, between the time of converting £ to $ and then later $ back to £ you also have to report gains/losses, however the $'s deployed for sub-set periods into US stocks should be discounted from that.

It's somewhat like accumulation funds, where you adjusted the average cost upward in reflection of dividend values accumulated, or otherwise you end up paying tax twice. Except with FX you may in some cases end up revising the average price downward.

A lot more difficult to explain than do, but I treat it the same as though the US$ were a 'share' and revise the average cost in a similar manner to that of buying/selling additional 'shares' in the same 'stock' (US$). Where the purchase of US stocks (priced in US$) is a 'sell some of shares' in the FX element, and the sale of US stocks (priced in US$) is 'buy some more of 'shares' in the FX element. The stock gain/loss element incorporates FX changes (gain/loss), and as such should be discounted from the actual US$'s you hold, otherwise you could end up paying tax twice.

Not sure if that is the correct way, but its a fair way that I doubt HMRC would contest.

So basically, you buy $100 for 80p per 'share' (1.25 US$/£)
You later sell $60 'shares' at 1.10/'share' (in order to buy $60 of a actual US stock), so you're left with $40 'shares' (dollars), but that's wasn't a actual sale, so you don't report it, not at least until you actually reconvert $ back into $.

Bought (FX'd £ into $) $100 for a cost of -£80 ($1.25/£)
Sold $60 for +£54 ($1.10/£) ... to buy $60 of shares
So you're left with $40 that cost (80-54=) £26 ... or £1.57 average cost per 'share' (dollar).

... later and assuming the shares and FX rate remain the same you ...
sell $60 of shares back into US$ (at a $1.10/£ exchange rate = as though bought $60 for £54)
So you now have $100, that cost (80-54+54=) £80, or a average cost per share (dollar) of $1.25/£

[y0rkiebar]

Thanks, understand. I will use the gains/losses on the stock sale (at the appropriate $ ->£ rates for buy/sell) and the Schwab $ -> UK £ transaction gain/loss when transferring proceeds.

[pochisoldi]

I've always used the actual GBP price for the cost:
Three examples (no dealing charges for any of these)
a) Share scheme (unapproved) shares bought with taxed money deducted from payroll - used the amount of money deducted.
b) Share scheme (unapproved) matching shares issued, with tax due paid by feeding through payroll - the gross value of the shares shown in the salary side of the payslip.
c) Share scheme (approved) shares handed over after the 3 year period - the GBP value stated in the scheme document.

When I sold used the GBP proceeds I received in my hand, after the proceeds were "wired" to my UK bank account.

Using that method, all the "cost of purchase" and "cost of sale" calculations were effectively done for me. (No need to do pooling/cost averaging - I sold the whole of each holding in one transaction).

Note that for (a) there was always a 2 or 3 week delay between payroll deduction and the actual purchase
For (b) the shares were payrolled a couple of weeks after they were matched.
Any delays were down to the scheme, and not to me, and as far as I was concerned when the money was deducted I was committed to buy at whatever exchange rate and whatever share price.
For all three examples, when I sold, it was sale, settlement, forex transfer, money received with minimal delay.

PochiSoldi

[snagga]

I agree entirely with the views expressed that the cost of the shares acquired should be calculated in sterling at the FX rate at the date of purchase and the proceeds of selling the shares could be calculated in sterling at the FX rate at the date of sale. See for example https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg78310.

IMO it is not necessary (or allowed) to get into the complexity of calculating gains/losses on FX cash balances held in broker accounts. Generally a foreign currency credit balance with a financial instituion is (or would be) a chargeable asset and the usual princples for calculating gains and losses in sterling terms based on FX rates at the time of acquisition and disposal would apply. In particular, spending foreign currency to buy shares in the foreign currency would be a disposal of that foreign currency at that time (and you would not wait until you had actually converted the acquired shares back into cash - see the linked example above). However, in order to avoid the practical difficulties of tracking such gains and losses and consdering that these gains/losses tend to be small, there is an exemption for gains/losses arising on foreign currency bank accounts (introduced circa 2012) and simple debts (held by the original creditor and not a "debt on a security") in foreign currency - see https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg78321. In filing my own tax returns, I have regarded this exemption as applying to cash balances with brokers because they are beneficial interests in bank accounts and/or simple debts owed by the broker. (NB: If your broker is Degiro, be aware that "cash balances" with them are actually converted into investments in money market funds so the situation is different.)

[scrumpyjack]

Yes, the rules say price and exchange rate on date of sale.

However, as part of your “investment” activities, you should also pay/reclaim any gain/loss on the currency trade too. I.e. the difference between the rate when you acquired the USD and the rate when you converted them.

So in effect, you would simply combine these two taxable gains if, as scrumypjack suggests, you used the actual UK remittance as your sale proceeds.

Gryff

'Investment activity' costs are not allowable except where directly incurred in executing the specific share transaction. So broker's contract note charges are allowed but other broker fees (custody/admin etc) are not

[gryffron]

Yes, the rules say price and exchange rate on date of sale.
However, as part of your “investment” activities, you should also pay/reclaim any gain/loss on the currency trade too. I.e. the difference between the rate when you acquired the USD and the rate when you converted them.
So in effect, you would simply combine these two taxable gains if, as scrumypjack suggests, you used the actual UK remittance as your sale proceeds.

'Investment activity' costs are not allowable except where directly incurred in executing the specific share transaction. So broker's contract note charges are allowed but other broker fees (custody/admin etc) are not

But currency costs ARE a direct cost of trading foreign shares. And currency investment (not involving shares) still incurs CGT. So what's the problem? Regardless of whether sale & currency transfer occurs as a single event, or two separate ones, the overall gain and thus tax would be the same. No?

Gryff

[bluedonkey]

AFAIW the purchase cost would be converted at the rate applicable when the shares were acquired. The sale would use the rate at the date of sale.
If the proceeds were converted and remitted promptly and there had not been a material currency movement, I doubt HMRC would mind you using the sterling proceeds.

I agree.

[SalvorHardin]

But currency costs ARE a direct cost of trading foreign shares. And currency investment (not involving shares) still incurs CGT. So what's the problem? Regardless of whether sale & currency transfer occurs as a single event, or two separate ones, the overall gain and thus tax would be the same. No?

Yes. In theory the foreign exchange commission charged on money which is converted into the foreign currency (that is then used to buy the shares) is an allowable cost.

The problem is that doing this is a red flag to HMRC. Unless you can clearly show that the money is only used to buy the shares, HMRC can argue that the forex cost should be ignored. Doing this will make HMRC suspicious and they might investigate further.

It's much easier to buy the foreign shares using sterling. Then the foreign exchange commission will form part of the cost on the contract note. That's what I've done in the past and I've never had a problem with HMRC.

Years ago I was told of a case where the investor had charged all sorts of investment related costs against his capital gain for CGT. HMRC responded by treating all.of his investment activity as a business liable to income tax (and National Insurance) as a sole trader. Very expensive.