Ouch-New tax rate of 1,207%

John is 58 and was born in the USA. He came to the UK around 30 years ago and has been resident here every year since arriving. He is therefore deemed domiciled in the UK for all tax purposes since 5^th April 2017, and pays tax on his worldwide income on the arising basis.

John has been very successful and has built up substantial reserves of cash amounting to around $10mn. John is an additional rate 45% taxpayer and is very cautious in terms of investment risk and still thinks in US dollars, so keeps most of his money in US dollar bank accounts. The bank accounts earn no interest. In November 2018 John is approached by one of his financial advisors with a suggestion to earn a little bit of interest on his cash balances at no risk – he suggests buying short-dated US Treasury bills which will provide him with a little bit of interest between purchase and redemption with virtually no risk. John agrees to the suggestion. On 8 November 2018, the financial advisor purchases a $10mn US Treasury bill for $9,826,204 and it is redeemed on 18 July 2019 for $10mn, making a nice profit of $173,796.

On 11^th October 2019, the same financial adviser purchases another $10mn US Treasury bill for $9,963,769 and this is redeemed for $10,000,000 on 2 January 2020, making a further profit of $36,231.

John has made a profit of $210,027 and is pleased with the advice he has received.

John instructs WSM to prepare his 2019/20 tax return and realises he has received very bad investment advice. The US Treasury bills he has purchased are known as deep discounted securities, and the entirety of the gain on such assets, including any exchange gain, are taxable as income. Furthermore losses on such assets are not allowable losses and cannot be set off against and gains.

The purchase and sale of the assets must be converted into GBP at the exchange rates ruling at the date of purchase and sale. During the ownership of the first bond, GBP weakened but during the ownership of the second bond GBP strengthened.

The GBP equivalent of the purchase price of the first bond on 8 November 2018 was £7,473,139 and the sale proceeds converted to £8,058,660 giving a GBP gain of £585,521, taxable at 45% = £263,484.

The GBP equivalent of the purchase price of the second bond on 2 January 2020 was £8,139,445 and the sale proceeds converted to £7,575,751 giving a GBP loss of £563,693. That loss cannot be set off against the gain on Bond 1.

John reviews his investment performance for the year. He has made a profit of $210,027, which is equal to £164,186 using the average exchange rate of $1.2792 = £1 for the year. His tax liability on that is £263,484, or 160% of his income. In pure GBP terms, his $ accounts have increased by £21,828 (£585,521 – £563,693) but his tax liability is £263,484 – a tax rate of 1,207%. Ouch.