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Ask an expert: Foreign exchange on unrealised gain on loan asset

Q: Is foreign exchange on an unrealised gain on a loan asset subject to tax? My client A lent $100m to B. A has Sterling functional currency for accounting purposes and has revalued the loan asset at year-end resulting in an accounting profit of $5m in the profit and loss account. This profit is however unrealised because A still holds the loan asset and has not sold it or it has not been repaid by B. What is the tax treatment of the accounting ‘profit’ which has arisen?

A: Prima facie a foreign exchange gain or loss on a loan whether realised or unrealised will be subject to tax under the loan relationship rules.


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