What this post is. The reference piece for the FX regime in a UK investment company. It explains the single classification — monetary vs non-monetary — that decides which of two completely different tax treatments applies, why the two paths diverge sharply during the holding period, and what that means in practice.
When a UK company holds a foreign-currency investment, how the exchange-rate movement is taxed depends entirely on one classification. If the holding is a monetary item — cash, a bond, a deposit — the currency move is retranslated every accounting period and taxed then, as a non-trading loan-relationship credit or debit. If it is a non-monetary item — an equity or an equity fund — there is no annual FX charge at all; the currency movement sits inside the sterling chargeable gain at disposal and is taxed only when the asset is sold. Almost every FX error in a UK investment company traces back to getting that one fork wrong.
In brief:
- FX treatment in a UK company forks on one question: is the holding monetary (cash, bonds, deposits) or non-monetary (equities, equity funds)?
- Monetary items are retranslated every accounting period; the move is a non-trading loan-relationship credit or debit, taxed as it arises.
- Non-monetary items are not separately retranslated; the FX move is absorbed, untaxed, into the holding period and crystallises only inside the sterling chargeable gain at disposal.
- The classification is stable by instrument class: bonds, gilts, cash and deposits are monetary; equities, ETFs and funds are non-monetary.
- For a sterling-functional company the CT computation is always in sterling (CTA 2010 s.5); FX is an accounts-level and disposal-level matter, never a separate CT-layer translation step.
The CT computation is always in sterling
CTA 2010 s.5(1) — “Basic rule: sterling to be used” — requires the income and chargeable gains of a company for an accounting period to be calculated and expressed in sterling. For a UK company whose functional currency — the currency of its primary economic environment (FRS 102, para 30.2), normally the one in which it earns income, pays expenses and raises capital — is sterling, s.5(1) is the whole story: there is no separate currency-translation layer in the CT computation. The CTA 2010 ss.6–9 machinery, which handles companies with a non-sterling functional currency, does not arise for the typical UK Family Investment Company, HoldCo or investment SPV; it is a more complex regime that requires specialist treatment.
For a sterling-functional company, then, exchange differences — the gains and losses arising when a foreign-currency item is expressed in sterling at two different points in time (CTA 2009 s.475) — are either dealt with inside the loan-relationships regime as they arise each period, or absorbed into a chargeable gain at disposal. There is no third category.
What makes an item monetary or non-monetary?
The term comes from the accounting standards. A monetary item is, in the language of FRS 105’s glossary, “units of currency held and assets and liabilities to be received or paid in a fixed or determinable number of units of currency.” The test: does the holding represent a right to a fixed or determinable number of currency units, or an ownership interest whose value floats with an underlying?
For the instruments a UK investment company typically holds, the answer is stable:
| Instrument | Classification |
|---|---|
| Listed equities, ETFs | Non-monetary |
| OEICs, unit trusts, investment trusts (equity funds) | Non-monetary |
| Corporate bonds, gilts | Monetary |
| Cash, term deposits, broker cash balances | Monetary |
| Money market funds | Non-monetary (legal form is fund units, not a cash deposit) |
A bond or gilt is a right to receive fixed coupon payments and redemption proceeds in a determinable amount — monetary. An equity or fund unit is an ownership interest whose value moves with the underlying portfolio — non-monetary.
Two recharacterisations sit on top of this. A qualifying corporate bond (QCB) — defined for a company under TCGA 1992 s.117(A1) as any asset representing a loan relationship of a company — is exempt from chargeable gains (s.115) and is taxed exclusively under the loan-relationships regime (CTA 2009 s.464). Every corporate bond and gilt held by a UK company is a QCB on this definition. FX on it is a loan-relationships matter, not a capital-gains matter. Separately, a bond fund — a fund that fails the CTA 2009 s.493 60% qualifying-investments test — is treated as a creditor loan relationship for CT on a fair value through profit or loss (FVTPL) basis under s.490, regardless of its legal form as fund units. A fund holding initially classified as non-monetary is therefore pulled onto the loan-relationships path. This is a per-fund determination, not a rule that applies to equity funds generally.
The accounting rule behind the exchange differences
The tax characterisation follows the accounts, so the accounting rule must be stated first. At each reporting date, FRS 102 para 30.9 (and FRS 105 para 25.5 for a micro-entity) requires:
- Monetary items translated at the closing rate — the spot rate at the reporting date. The exchange difference is recognised in profit or loss in the period (para 30.10).
- Non-monetary items at historical cost translated at the transaction-date rate and not retranslated. No exchange difference arises while the asset is held.
- Non-monetary items at fair value translated at the rate at the date the fair value was determined (para 30.9(c)). The accounts then show a combined fair-value-and-FX movement on the line; as a matter of CT, the whole movement has no consequence until disposal.
HMRC’s Corporate Finance Manual states the same balance-sheet position: monetary items “translated at the closing rate”; non-monetary items “translated at the historical rate of exchange when they were acquired, and are not re-translated” (HMRC, CFM26040).
FRS 105 aligns with FRS 102 on monetary items — both retranslate at the closing rate each period — but has no fair-value limb (FRS 105 does not permit investment-at-fair-value measurement). An FRS 105 micro-entity therefore always holds a foreign-currency equity at historical cost, never retranslated, with the FX effect entirely deferred into the disposal proceeds.
How monetary-item FX is taxed: the per-period retranslation rule
For a foreign-currency monetary item — a USD bond, a EUR deposit, a USD broker cash balance — the accounting retranslation at the closing rate generates an exchange difference each period, and that difference is brought into CT as a non-trading loan-relationship credit or debit (NTLR).
The statutory route. CTA 2009 s.328(1) provides that the profits and losses arising from a company’s loan relationships within the s.306A(1) gateway “include exchange gains and losses so arising.” The meaning of “exchange gains and losses” is in s.475: a profit or loss arising from comparing, at different times, the sterling expression of the value a company places in another currency on an asset or liability — precisely the difference produced by retranslating a foreign-currency item at two different dates’ rates. The amount follows the accounts on the s.307/s.313 basis of accounting.
The retranslation rule, period by period:
- Year 1 (the holding’s first accounting period): from the acquisition-date spot rate to the first period-end closing rate.
- Subsequent periods: from the prior period-end rate to the current period-end closing rate.
The exchange difference — positive for a gain (sterling has weakened against the foreign currency), negative for a loss — is brought into account as an NTLR credit or debit in the period it arises. The asset does not need to be disposed of; the FX is taxed as it accrues.
On a foreign-currency bond there are two FX sub-components that the accounts may present as a single line: FX on the principal (the retranslation of the bond’s carrying amount) and FX on the interest accrual (where the accounting policy uses an average rate for the coupon stream, the difference between that average-rate accrual and the settlement-date spot is itself an exchange difference). Both are NTLR credits or debits under s.328 and run through the loan-relationships regime.
Worked example: USD bond across three years
A GBP-functional UK Ltd (FRS 102, amortised cost) buys a USD 100,000 par-value bond at par on 1 January 2025 with a 3% annual coupon paid 31 December, redeeming at par on 31 December 2027. Spot rates (USD per £1):
| Date | Rate | USD 100,000 in sterling |
|---|---|---|
| 1 Jan 2025 (acquisition) | 1.2500 | £80,000.00 |
| 31 Dec 2025 (period-end 1) | 1.2000 | £83,333.33 |
| 31 Dec 2026 (period-end 2) | 1.2500 | £80,000.00 |
| 31 Dec 2027 (redemption) | 1.2800 | £78,125.00 |
Applying the retranslation rule:
| Period | Movement | Exchange difference | CT character |
|---|---|---|---|
| Year 1 (2025) | £80,000 → £83,333.33 | +£3,333.33 | NTLR credit |
| Year 2 (2026) | £83,333.33 → £80,000 | −£3,333.33 | NTLR debit |
| Year 3 (2027) | £80,000 → £78,125 | −£1,875.00 | NTLR debit |
Lifetime principal FX: +£3,333.33 − £3,333.33 − £1,875.00 = −£1,875.00. Independent check: USD 100,000 at 1.2500 = £80,000; at 1.2800 = £78,125; total economic FX = −£1,875. The per-period rule and the lifetime economic result tie exactly. A net-debit period (Year 2 here) feeds the NTLR-deficit machinery covered in the loan-relationships regime post. On redemption there is no separate FX gain or loss beyond the Year 3 retranslation: the FX on this bond is fully taxed through the CT computation before any disposal takes place.
How non-monetary-item FX is taxed: absorbed into the chargeable gain
A foreign-currency equity — a USD-listed share, a EUR-denominated ETF — produces no annual FX line in the CT computation while it is held. The FX exposure accumulates silently during the holding period and crystallises only when the asset is sold.
At disposal, the FX effect is embedded in the chargeable gain by the per-leg-at-spot method: the acquisition cost is the sterling equivalent of the foreign-currency consideration at the acquisition-date spot rate, and the disposal proceeds are the sterling equivalent at the disposal-date spot rate. The chargeable gain is sterling proceeds minus sterling cost. This is the rule stated by HMRC at CG78310 (Bentley v Pike [1981] 53 TC 590) — and it is not derived from TCGA 1992 s.252 (a recurring citation error; s.252 governs simple debts, not the sterling translation of foreign-currency disposals).
The sterling gain or loss at disposal therefore already includes the full FX effect of the holding period. A USD equity bought when sterling was strong and sold when sterling was weak will show a larger sterling gain than the dollar price movement alone would suggest; bought weak and sold strong, a smaller sterling gain or even a sterling loss despite a dollar gain. Neither the gain nor the FX component is separately identified: the whole thing is one sterling chargeable gain. The mechanics — the s.104 pool, share matching, cost tracking — are covered in the chargeable-gains regime post.
Worked example: USD equity held across a year-end then sold
A GBP-functional UK Ltd (FRS 102, equities at FVTPL) buys 2,000 shares in ABC Corp at USD 50 on 1 October 2024, spot USD 1.2500 per £1. Year-end is 31 December. It sells all 2,000 at USD 60 on 1 June 2025, spot USD 1.3000 per £1.
Acquisition. Cost = USD 100,000 ÷ 1.2500 = £80,000.00 sterling — the pool cost.
Year-end. Suppose market price is USD 55 (fair value USD 110,000), spot USD 1.2000 per £1. Under FRS 102 para 30.9(c) the FVTPL equity is translated at the fair-value-date rate: carrying amount = USD 110,000 ÷ 1.2000 = £91,666.67. The accounts recognise a combined fair-value-plus-FX movement of £11,666.67 in profit or loss. CT position at year-end: nil — no chargeable gain (not yet disposed of) and no separate FX (non-monetary). The £11,666.67 accounting movement has no CT consequence.
Disposal. Proceeds = USD 120,000 ÷ 1.3000 = £92,307.69 sterling.
Chargeable gain (per-leg-at-spot, CG78310): £92,307.69 − £80,000.00 = £12,307.69. The dollar’s weakening from USD 1.2500 to USD 1.3000 over the holding period is already inside this figure — no separate FX line, no annual charge, no adjustment for the prior-year accounting movement. The year-end FVTPL revaluation is irrelevant to the chargeable gain.
The tax and accounting paths diverged during the holding period (the accounts moved by £11,666.67 at year-end; CT saw nothing) and reconcile only at disposal, where the £12,307.69 CT gain captures the whole movement.
The fork, side by side
| Monetary (bond, gilt, deposit, FX cash) | Non-monetary (equity, ETF, fund) | |
|---|---|---|
| Retranslated each period? | Yes — prior period-end → current period-end (Year 1: acquisition rate → first period-end) | No |
| FX taxed when? | Each period, as it accrues | Only at disposal, inside the sterling chargeable gain |
| CT character | NTLR credit or debit (CTA 2009 s.328 → s.306A(1)) | Part of the chargeable gain (per-leg-at-spot, CG78310) |
| Statutory priority | CTA 2009 s.464 makes Part 5 the exclusive regime for QCBs | TCGA 1992; FX not separable from the gain |
| Accounting source | FRS 102 para 30.9(a) / 30.10; FRS 105 para 25.5(a) | FRS 102 para 30.9(b) (historical cost) or 30.9(c) (fair value)† |
† Under para 30.9(c) a non-monetary item at fair value is translated at the rate at the date the fair value was determined, so the accounts do contain an FX component each period — but it is bundled into the combined fair-value movement and, for CT, the whole movement is irrelevant until disposal. There is no separate FX line in either case.
The asymmetry this creates between the CT position and the accounting position is most visible for non-monetary items at FVTPL: the accounts show FRS 102 fair value moves including currency every year, while the CT position is unchanged. That divergence — and how it unwinds at disposal — is covered in the FRS 102 vs CT reconciliation post.
What gets the classification wrong in practice
Three recurring errors.
Treating a foreign-currency fund as if its FX behaviour were settled by what it holds. The position is per-fund and turns on the s.493 60% test, not on a general “bond funds are monetary” rule. The test is checked against the fund’s investment mandate.
Citing TCGA 1992 s.252 for the per-leg-at-spot rule. s.252 governs simple debts; it is not the basis for the sterling translation of foreign-currency chargeable gains on non-monetary assets. The correct authority is CG78310 (Bentley v Pike).
Assuming non-sterling-functional companies are treated the same way. For a UK company whose functional currency is genuinely not sterling, the CT framework is different: CTA 2010 ss.6–9, the s.9A designated-currency election, and the s.9C chargeable-gains rule apply. This is a distinct and more complex regime that requires specialist treatment.
Where to go next
The monetary path — the NTLR credit/debit route for bonds, gilts and deposits, including the s.464 priority, NTLR-deficit relief and worked bond examples — is covered in the loan-relationships regime. The non-monetary path — the sterling chargeable gain computed on the s.104 pool — covers matching order, pool maintenance and worked gain computations. The holding-period divergence between the accounts and CT for FVTPL non-monetary items is unwound in the FRS 102 vs CT reconciliation post.
Sources
Legislation
- CTA 2010 s.5 — Basic rule: sterling to be used. legislation.gov.uk
- CTA 2010 ss.6–9, s.9A, s.9C — non-sterling-functional currency regime and designated-currency election (out of scope for this piece; flagged for completeness). legislation.gov.uk — s.6; s.9A; s.9C
- CTA 2009 s.306A / s.307 / s.313 — loan-relationships gateway, general principles, basis of accounting. legislation.gov.uk — s.306A
- CTA 2009 s.328 — Exchange gains and losses within loan-relationship profits. legislation.gov.uk
- CTA 2009 s.464 — Priority of Part 5 over chargeable gains. legislation.gov.uk
- CTA 2009 s.475 — Meaning of expressions relating to exchange gains and losses. legislation.gov.uk
- CTA 2009 s.490 / s.493 — Bond fund: treatment as creditor loan relationship; 60% qualifying-investments test. legislation.gov.uk — s.490; s.493
- TCGA 1992 s.115 — Exemption for gilt-edged securities and qualifying corporate bonds. legislation.gov.uk
- TCGA 1992 s.117(A1) — Qualifying corporate bond: the company-specific definition (any asset representing a loan relationship of a company). legislation.gov.uk
HMRC manuals
- HMRC, CFM26040 — Foreign exchange: balance-sheet treatment under new UK GAAP (monetary at closing rate; non-monetary at historical cost, not retranslated). gov.uk/hmrc-internal-manuals/corporate-finance-manual/cfm26040
- HMRC, CG78310 — Foreign currency disposals: per-leg-at-spot rule (Bentley v Pike [1981] 53 TC 590). gov.uk/hmrc-internal-manuals/capital-gains-manual/cg78310
Accounting standards
- FRS 102, Section 30 — Foreign Currency Translation, paras 30.2, 30.7–30.11 (September 2024 edition). Financial Reporting Council.
- FRS 105, Section 25 — Foreign Currency Translation, paras 25.3–25.6 (September 2024 edition). Financial Reporting Council.
Case law
- Bentley v Pike [1981] 53 TC 590 — basis for the per-leg-at-spot sterling translation rule for foreign-currency disposals; codified by HMRC at CG78310.
Last reviewed: 2026-05-20.