• Brexit – a foreign exchange conundrum

Brexit – a foreign exchange conundrum

19 July 2016

It is often a surprise to taxpayers that our legislation taxes unrealised foreign exchange gains (unless exemptions apply).

For example, let’s assume James borrows GBP 300,000 to acquire a property in the South of England (Basildon, Essex).  At the time of the borrowing assume the exchange rate was NZD 1 = GBP 0.50.

Based on this exchange rate, the NZD equivalent of the GBP 300,000 is NZD 600,000.

As we are aware the Brexit decision has caused shock waves around global financial markets and exchange rates alike.  A consequence is that the GBP has weakened against the NZD and now, for the purposes of the example, assume 1 NZD buys GBP 0.55.

Restating the GBP 300,000 borrowing, the NZD equivalent is NZD 545,455.  Under the current exchange rate, James now only needs to repay an equivalent of NZD 545,455 for the borrowings.  He has made a gain of NZD 54,545.  Albeit this gain is unrealised, it is taxable income (unless he qualifies for concessionary treatment) and should be considered in your tax planning programme.