Foreign Interest and Depreciation

Hi, I currently have funds in a savings account in Turkey where I earn interest. However, my capital is experiencing a depreciation compared to the pound. Allow me to illustrate with an example: Let's consider that I transferred £10,000 to Turkey, converted it to the local currency TRY, and opened a savings account. At the end of a given term (be it 6 months or 1 year), I earned interest in TRY equivalent to £100. Yet, by the conclusion of that term, the TRY lost value against the pound, resulting in the depreciation of my initial capital to £9,700. Although it may seem like I earned £100 in interest, in reality, I incurred a loss as the total value of my funds decreased to £9,800 (£9,700 main + £100 interest). In this scenario, what is the interest earned that needs to be included in the Self-Assessment.

Hi,

Any amount of overseas interest must be declared in a Self Assessment tax return. The fact that the capital is affected by currency fluctuations is irrelevant. The interest is the amount of Turkish Lira paid on the capital in the account and when converted to pounds sterling, it should be declared in a tax return as foreign interest.  

The following guidance advises that as currency, other than pounds sterling, is considered an asset and its disposal can give rise to Capital Gains Tax or allowable losses. 

CG78300 - Foreign currency: introduction

Thank you.

Hi, Thanks for your reply. I have a follow-up question. You said that the interest must be declared when it is converted to pounds. So, I shouldn't be declaring it yet, if it still stays as Turkish Lira, right? Thanks

Hi Syrilo Azi,
No.  
You are required to declare your world-wide income.  
So although your interest is in Turkish Lira, you will need to convert the amount of interest to pounds sterling and declare that sum, regardless of whether the interest is in Lira or sterling.
Thank you.

Okay, got it. In Turkey, there is a specific savings account known as the 'Foreign Currency Indexed Fixed-Term Deposit Account.' These accounts are designed to safeguard the value of the deposit against fluctuations in foreign currency exchange rates. I also have funds in these accounts. Should they be reported in the same way as traditional accounts? Let me illustrate how they operate with an example. Suppose I deposited 1000 Turkish Lira into the account. The account is indexed to USD, and the TRY/USD exchange rate at that time is 10, meaning 1000 TRY equals 100 USD. At the end of the fixed term, I earned 100 TRY in interest. However, by that time, the TRY/USD exchange rate increased to 12, causing my deposit to lose value against the USD. Including the interest, the total amount is now 1100 TL, equivalent to 91.67 USD. Recognizing the loss in value, the Central Bank compensates me with 100 TL as an exchange rate difference, bringing my total to 1200 TL, which equals 100 USD (exchange rate = 12 at that time). How should this be reported to HMRC?"

Hi
Yes this would be taxable as interest has still been received.

Thanks for the reply. So, only the interest must be reported. I don't have to report compensation I received from the Central Bank as far as I understand. Thanks

Hi Syril Azi,
To confirm you are correct. 
Thanks 
 

Thanks a lot. I appreciate it.

Hey, I have a related question regarding savings accounts in Turkey. In Turkey, interest earned from Turkish banks is automatically taxed, and I pay income tax for them. Am I eligible to claim tax relief for the interest amount I earned? Does the double taxation agreement between the UK and Turkey allow for that?

Hi
please refer to article 11 of the treaty -UK/TURKEY DOUBLE TAXATION AGREEMENT