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Currency Fluctuation Risk

Also known as: Exchange Rate Risk, Currency Risk

Definition

Currency fluctuation risk is the financial impact of exchange rate changes on foreign assets in your estate between death and distribution to beneficiaries.

When you die owning assets in foreign currencies—like a Spanish property worth €200,000 or a US bank account with $50,000—their pound sterling value can change significantly during estate administration.

What Does Currency Fluctuation Risk Mean?

Currency fluctuation risk in estate planning refers to how exchange rate movements affect foreign assets between when HMRC calculates inheritance tax and when beneficiaries receive their inheritance. HMRC requires estates to value foreign assets in sterling using official exchange rates at the date of death, as specified on Form IHT417 (Foreign Assets). This creates a fixed sterling value for tax purposes, but exchange rates continue changing during the 6-18 months of estate administration.

The risk works in two stages. Sarah dies owning a Spanish apartment worth €240,000. At her death, the exchange rate is £1 = €1.20, so HMRC calculates inheritance tax on £200,000. Ten months later when the property sells, the pound has weakened to £1 = €1.10. The €240,000 now converts to £218,182—beneficiaries receive £18,182 more than expected.

However, currency movements can work against beneficiaries. David has $80,000 in a US bank account. At death, £1 = $1.30, giving a tax value of £61,538. Eight months later, the pound has strengthened to £1 = $1.40. The $80,000 now converts to just £57,143—beneficiaries receive £4,395 less than expected. During typical estate administration (6-18 months), exchange rates commonly move 5-15% in either direction.

Transaction costs compound the risk. Banks charge exchange rates 3-5% worse than currency specialists, meaning on a £100,000 transfer, this represents £3,000-£5,000 in additional costs. Executors can use currency specialists who offer better rates and strategic timing options. Importantly, HMRC doesn't adjust inheritance tax even if currency crashes after death—you've paid tax on the higher date-of-death value regardless.

Common Questions

"When is the exchange rate determined for inheritance tax purposes?" The exchange rate is determined at the date of death. HMRC requires you to use their official exchange rates on that specific date to convert foreign assets into pounds sterling for inheritance tax calculations. This means the value is fixed at death, even if exchange rates improve or worsen during probate.

"Can currency fluctuations affect how much beneficiaries receive?" Yes, significantly. While inheritance tax is calculated using the date of death exchange rate, the actual distribution to beneficiaries happens months later during estate administration. If the pound strengthens against the foreign currency during this time, beneficiaries receive less in sterling terms than initially calculated.

"Should I convert foreign assets immediately after inheriting them?" There's no one-size-fits-all answer. Converting immediately protects against further currency drops but means you might miss favourable rate movements. Many people use currency exchange specialists who offer better rates than high street banks (typically 3-5% better) and can help time conversions strategically.

Common Misconceptions

Myth: "The exchange rate used for inheritance tax is the same rate when I receive my inheritance"

Reality: Inheritance tax is calculated using the exchange rate on the date of death, but you typically receive your inheritance 6-18 months later when estate administration completes. Exchange rates will have changed during this period, leaving beneficiaries surprised when actual distribution amounts differ from estate valuations.

Myth: "Currency fluctuation only matters if I'm losing money on the exchange rate"

Reality: Currency movements can work in your favour or against you. Favourable movements can increase distributions beyond the tax valuation. Additionally, even if rates stay stable, transaction costs guarantee losses without proper planning—banks charge 3-5% worse rates than specialists.

  • Foreign Assets: All foreign assets carry currency fluctuation risk requiring conversion to sterling for inheritance tax.
  • Overseas Property: Property sales involve large currency conversions where fluctuation risk has greatest pound-value impact.
  • Repatriation of Assets: Repatriating foreign assets to the UK converts currencies and crystallises exchange rate movements.
  • International Estate Planning: Comprehensive planning includes strategies to manage currency fluctuation risk across jurisdictions.
  • Foreign Bank Account: Foreign bank accounts face currency risk but offer flexibility in timing conversions.

Need Help with Your Will?

Planning your estate with foreign assets requires careful consideration of currency fluctuation risk. Understanding how exchange rate changes affect your beneficiaries helps you make informed decisions.

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Legal Disclaimer:

This article provides general information only and does not constitute legal or financial advice. WUHLD is not a law firm and does not provide legal advice. Laws and guidance change and their application depends on your circumstances. For advice about your situation, consult a qualified solicitor or regulated professional. Unless stated otherwise, information relates to England and Wales.