This guide is for families whose savings and spending sit in different currencies: Americans retiring in Britain on dollar accounts, Britons with US pensions, and couples who have not yet decided where to retire. In brief: the pound has more than halved and later nearly doubled against the dollar within a decade. If you spend sterling and hold dollars, the move that hurts is a stronger pound. Both tax systems measure currency gains in their own currency, which creates taxable gains that exist on only one side of the Atlantic.
What is currency risk for a family with dollar and sterling lives?
Currency risk is the chance that exchange-rate moves change what your savings can buy in the currency you actually spend. It matters when your assets and your future spending are in different currencies. A family that lives in England on dollar savings has this risk. So does a family that plans to retire to the US on UK pensions.
The risk is not that “the dollar” or “the pound” is risky in itself. The risk is the mismatch between the two sides of the household balance sheet. On one side are the assets: IRAs, 401(k)s, US brokerage accounts, SIPPs, ISAs, property, Social Security and the UK State Pension. On the other side are the liabilities: food, energy, council tax, care costs, and help for children who may themselves live in either country. When the two sides are in the same currency, exchange rates matter much less. When they are not, a twenty-year retirement can be decided as much by the exchange rate as by the stock market.
Currency risk also reaches your tax bill, not only your spending. The IRS measures everything in dollars and HMRC measures everything in sterling[4][14]. The same sale of shares can make a gain in one country and a loss in the other.
How far has the pound moved against the dollar?
Much further than most people expect. On Federal Reserve monthly averages since 1980, the pound has ranged from about $2.42 to about $1.09[1]. Several single episodes moved the rate by 25% to 80% within six years. The figures below are monthly averages, so daily extremes were wider.
| Episode | Start | End | Change in pound | Sterling value of $100,000 |
|---|---|---|---|---|
| Early-1980s collapse | Oct 1980: 2.4165 | Feb 1985: 1.0931 | −55% | £41,382 → £91,483 |
| Recovery | Feb 1985: 1.0931 | Nov 1990: 1.9642 | +80% | £91,483 → £50,911 |
| Climb to $2 | Jun 2001: 1.4020 | Nov 2007: 2.0701 | +48% | £71,327 → £48,307 |
| Financial crisis | Jul 2008: 1.9888 | Dec 2008: 1.4854 | −25% | £50,282 → £67,322 |
| Brexit referendum era | Jul 2014: 1.7066 | Aug 2019: 1.2160 | −29% | £58,596 → £82,237 |
| 2022 low | Jan 2022: 1.3555 | Sep 2022: 1.1320 | −16% | £73,774 → £88,339 |
The figures in the table are monthly averages of the Federal Reserve’s daily noon buying rates in New York, as published in its H.10 and G.5 releases[1][2]. The last two columns are our own arithmetic. The referendum on EU membership in June 2016 produced one of the sharpest moves of the period: the pound averaged about $1.42 that June and about $1.23 by October[1]. By August 2026 it averaged about $1.35, close to the IRS’s published average for 2025 of £0.759 per dollar, or roughly $1.32[1][3].
No one can reliably forecast the next episode, and history does not repeat on a timetable. What the record does show is the scale of possible moves over the length of a retirement. A plan that assumes today’s exchange rate for thirty years is assuming the one outcome that has almost never happened.
Which direction of exchange-rate move hurts me?
The move that hurts is the one that makes your spending currency more expensive in terms of the currency you hold. A household that spends pounds and holds dollars is hurt when the pound strengthens. A household that spends dollars and holds pounds is hurt when the pound weakens.
This is often misunderstood. American families in Britain tend to worry about a weak pound because it makes UK savings worth less in dollars. But if their spending is in pounds and their savings are in dollars, a weak pound helps them: each dollar withdrawn from an IRA buys more groceries in Surrey. Their real exposure is a strong pound. Between June 2001 and November 2007, $100,000 fell from about £71,000 to about £48,000 of spending power. That is a loss of about a third, with no change in the dollar value of the investments[1].
| Household | Mostly holds | Mostly spends | Hurt by | Helped by |
|---|---|---|---|---|
| American retiring in the UK on US accounts | Dollars | Pounds | Stronger pound | Weaker pound |
| Briton retiring in the US on UK pensions | Pounds | Dollars | Weaker pound | Stronger pound |
| UK retiree with a US workplace pension or Social Security | Dollar income | Pounds | Stronger pound | Weaker pound |
| Undecided about where to retire | Both | Not yet known | Depends on the final decision | Depends on the final decision |
Income streams count as well as savings. US Social Security, a US defined benefit pension and required distributions from an IRA are all dollar income. For a household living in Britain they act like dollar assets, even though they never appear on a statement as a balance.
Worked example: the same retirement under five currency histories (computed in Edale’s planner)
Fictional household, for illustration only. Alex and Sam are US citizens living in England. They hold $700,000 in US accounts (an IRA and a brokerage account) alongside UK pensions and ISAs, and they spend in sterling. They retire at 60. Each currency episode starts at retirement and plays once. The figure shown is usable money at 85, in today’s money, on the planner’s stated growth, inflation and tax assumptions. Results are not guaranteed and do not predict future exchange rates.
| Currency episode applied from retirement | What the pound did | Usable money at 85 | Change vs unchanged rate |
|---|---|---|---|
| Exchange rate unchanged | Flat | about £2.82m | — |
| Sterling’s climb to $2.00 (2001–07) | Rose | about £2.33m | about −17% |
| Sterling’s recovery (1985–90) | Rose | about £2.35m | about −17% |
| Brexit referendum era (2014–19) | Fell | about £3.28m | about +16% |
| Sterling collapse (1980–85) | Fell sharply | about £4.08m | about +45% |
Show the figures
| Currency path from retirement | Usable money at 85 |
|---|---|
| Exchange rate unchanged | £2,820,293 |
| Sterling's climb to $2.00 (2001–07) | £2,333,802 |
| Sterling's recovery (1985–90) | £2,349,026 |
| Brexit referendum era (2014–19) | £3,278,220 |
| Sterling collapse (1980–85) | £4,078,621 |
The range is wide. The same household, with the same investments and spending, ends up with somewhere between about £2.33 million and £4.08 million at 85, depending only on the path of the exchange rate. The two episodes where the pound rose each cost about half a million pounds against an unchanged rate. The two where it fell added between about £460,000 and £1.26 million. The pound’s collapse in the early 1980s would have been the most favourable outcome for this family. That is the opposite of how most people instinctively describe it.
Two points help explain the size of the effect. First, the dollar accounts are drawn on for twenty-five years or more, so the exchange rate applies to every withdrawal, not just once. Second, US tax for these US citizens is measured in dollars, while UK tax is measured in sterling. Exchange-rate changes can also shift how far the foreign tax credit covers each year’s US liability. The lesson for sterling spenders with dollar assets is that the risk to plan for is a stronger pound. These results are illustrative and depend on the planner’s assumptions.
How can a family match its savings to its spending currency?
The main tool is to hold roughly as many assets in each currency as you expect to spend in it, over the period that matters most. That is usually the first five to ten years of retirement, when a bad outcome cannot be recovered. This is called liability matching. It reduces currency risk without trying to forecast exchange rates. Whether and how far it suits you depends on your circumstances, including tax, so take advice before moving money between currencies.
In practice, families use several approaches, often in combination:
- A spending reserve in the spending currency. Holding a few years of planned spending in sterling cash or short-dated sterling bonds means an unfavourable exchange rate does not force a conversion at a bad moment.
- Counting income streams. The UK State Pension and a UK defined benefit pension pay sterling. Social Security and US pensions pay dollars. Each one offsets some of the other side’s exposure.
- Understanding what a fund is exposed to. The currency a fund is priced in is not its currency exposure. A dollar-priced fund of global shares holds companies earning in many currencies. A sterling-priced fund of US shares is still mostly exposed to the dollar unless it is hedged.
- Property. A UK home is a sterling asset. Its value, and the cost of downsizing or care, move in sterling.
- Timing conversions. Converting large sums in stages over time, instead of on a single date, spreads the exchange-rate risk. It does not remove it.
Matching has costs and limits. Moving money between countries can trigger tax in both, especially for US persons. Some sterling investments that are efficient for a British investor are punitive for an American. UK funds are generally treated as passive foreign investment companies (PFICs) in the US; see our guide to ISAs, UK funds and PFIC rules. A US IRA cannot simply be converted into sterling assets without a taxable withdrawal. For many American families the practical choice is limited to which currency the taxable savings and cash reserves sit in, and how much is drawn from each account each year.
What does currency hedging cost, and what are its limits?
A currency hedge locks in an exchange rate for a future date. Its cost or benefit comes mainly from the difference between the two countries’ interest rates. The forward exchange rate differs from today’s rate by roughly that difference, a relationship known as covered interest parity[5]. The Bank for International Settlements has documented persistent deviations since 2007, known as the cross-currency basis, so the relationship is not exact[5].
For a sterling spender hedging dollar assets, the relevant comparison is Bank of England Bank Rate against the US federal funds rate. When the two are close, hedging costs relatively little before fees. When the gap is wide, hedging becomes a noticeable drag or boost to returns every year. Central banks change rates several times a year, so the cost of a hedge rolled over a long retirement cannot be known in advance.
Hedging has limits for retirees:
- Horizon. Hedges are often rolled monthly or quarterly. They protect against short-term swings but do not fix the rate for a thirty-year retirement.
- Cash-flow effects. A hedge that loses money when rolled must be settled in cash. That can mean selling investments when the hedged asset has not yet recovered.
- Tax. For US persons, a hedged share class of a UK fund is still a UK fund, with the PFIC issues that brings. Currency contracts entered into for profit are generally within the US rules on foreign currency transactions, which tax gains as ordinary income[6].
- Hedging the wrong thing. Hedging an asset’s currency protects its value in your spending currency. If you are not yet sure where you will retire, you cannot yet know which currency to hedge into.
Matching assets to spending often does more of the work, at lower cost, than hedging. For a household planning a move between the UK and the US, the target currency itself may change during the plan.
How does the US tax currency gains for Americans in the UK?
The US measures everything in dollars, so a US person living in Britain can have taxable dollar gains on sterling transactions. Items of income and expense are translated at the exchange rate prevailing when they are received, paid or accrued[4]. The IRS also publishes yearly average rates. For the pound these were 0.783 per dollar for 2024 and 0.759 for 2025[3].
The main rules for individuals are:
- Section 988 transactions. Exchange gains and losses on foreign currency transactions are generally ordinary income or loss[6]. This covers, for example, sterling bonds, currency contracts and some sterling deposits held for investment.
- The personal-use exception. Section 988 does not apply to personal transactions of individuals. If you dispose of foreign currency in a personal transaction, no gain is recognised from exchange-rate changes unless the gain exceeds $200[6][8]. A personal transaction is broadly one that is not a business or investment activity[6].
- Losses on personal assets. Individuals can deduct losses only from a trade or business, a transaction entered into for profit, or casualty and theft[7]. A currency loss on a personal transaction is therefore generally not deductible, while a gain above the $200 threshold can be taxable.
- Sterling mortgages. Repaying a sterling home loan can produce a currency gain in dollar terms if the pound has weakened since the money was borrowed. If the pound has strengthened, the matching loss on a personal home loan is generally not deductible. The calculation is technical and should be handled by a US tax preparer.
- Selling a UK home. The gain is worked out in dollars, with the cost converted at the rate when bought and the proceeds at the rate when sold. A weak pound at sale can shrink or remove the dollar gain, and a strong pound can create one. The home sale exclusion of up to $250,000, or $500,000 on a joint return, applies if the ownership and use tests are met[9].
- Foreign tax credits. The credit for UK tax is also translated into dollars, so exchange rates affect how far it covers the US liability on the same income. Foreign tax credits cannot reduce the 3.8% net investment income tax[15]. A dollar gain that arises only because of currency moves can therefore still attract US tax. Our guide to how both tax systems apply to Americans in the UK explains the credit in detail.
How does the UK tax currency gains?
The UK measures everything in sterling. Gains on assets bought and sold in dollars are worked out by converting the cost at the exchange rate on the purchase date and the proceeds at the rate on the sale date. HMRC does not accept working out the gain in dollars and converting it at the end[11]. This approach rests on the case of Bentley v Pike[11].
The effect can be large. As illustrative arithmetic, suppose you buy US shares for $10,000 when the pound is at $2.00, a cost of £5,000. You sell them for the same $10,000 when the pound is at $1.25, for proceeds of £8,000. You have made no gain in dollars but a £3,000 gain for UK capital gains tax. The reverse also applies. A dollar gain can become a sterling loss if the pound has risen enough. For 2026/27 the capital gains tax annual exempt amount is £3,000. Gains above it are taxed at 18% within the basic-rate band and 24% above it[13].
| Event | UK treatment | US treatment |
|---|---|---|
| Selling US shares after a currency move | Gain in sterling: cost and proceeds each converted on their own date | Gain in dollars; no currency effect on a dollar asset |
| Selling UK shares after a currency move | Gain in sterling; no currency effect | Gain in dollars: cost and proceeds each converted on their own date |
| Converting dollars in a bank account to sterling | No chargeable gain or allowable loss for individuals since 6 April 2012 | For a US person the dollar is not a foreign currency, so there is no exchange gain |
| Spending sterling cash on living costs | No tax event | Personal transaction: gain ignored if $200 or less; loss not deductible |
| Repaying a sterling mortgage | No tax event | Possible exchange gain; loss generally not deductible |
| Receiving dollar dividends or pension income | Converted at the rate on the day it arises | Already in dollars |
Two UK exemptions help. Since 6 April 2012, foreign currency bank accounts held by individuals, trustees and personal representatives are treated as simple debts. They give rise to no chargeable gains and no allowable losses[12]. Currency bought for personal spending abroad is also exempt. Other foreign currency, such as banknotes held as an investment, remains a chargeable asset[10]. Foreign income, such as dollar dividends, interest and pension payments, is converted at the exchange rate on the day it arose[14].
For a UK-resident American, the same sale can therefore produce a gain in one country and a loss in the other. The foreign tax credit cannot always bridge that difference. Timing sales, and choosing which currency an asset is held in, has tax consequences as well as investment ones. Tax rules change, and their effect depends on individual circumstances.
How the Edale Wealth Hub helps
Edale’s planner models a household across the US and UK at once, in any mix of currencies, year by year to age 100 and beyond. Each account keeps its own currency. Withdrawals are converted into the currency the household spends, so the plan shows what the family can actually use.
For currency risk, the planner includes twelve named currency episodes for GBP/USD and GBP/EUR going back to 1980. Examples include the early-1980s collapse, sterling’s climb to $2, and the Brexit referendum era. An adviser can move an episode along the timeline, for example starting it at retirement or ten years later, and see how usable money, sustainable spending and the probability that money lasts all change. Episodes can be combined with the planner’s other stress tests: Monte Carlo simulation of hundreds of market histories, real market history replayed in best and worst order to show sequence risk, longevity and care costs. Scenarios can be compared side by side, including alternative withdrawal orders. That shows, for example, whether drawing on sterling or dollar accounts first changes the outcome under a strong-pound episode.
Tax is calculated in both systems. For US persons, the planner shows how UK tax, US federal tax and foreign tax credits interact each year. The move-country what-if tests retiring in the UK or the US, which changes the spending currency itself.
In the client portal, My Investments consolidates linked Interactive Brokers accounts in the UK and the US, with a £/$ toggle. Its tax boxes show capital gains, dividends and interest year to date in both sterling and dollars, converted at each transaction’s date. The sterling gains are a guide only, because UK capital gains tax uses share pooling and matching rules. A US tax summary, which is not a Form 1099, can be shared with your accountant or tax preparer. Edale does not prepare tax returns.
The episodes replay the past. They do not forecast the future, and results depend on the planner’s assumptions. To see how currency moves would affect your own plan, arrange a conversation or read more about the cashflow planner.
Frequently asked questions
Is a weak pound bad for Americans retiring in the UK?
Usually not, if they spend in pounds and hold dollars. A weaker pound means each dollar withdrawn buys more in Britain. The exchange-rate risk for these households is a stronger pound, which shrinks the sterling value of dollar savings and income. Between 2001 and 2007, the pound’s rise cut the sterling value of $100,000 by about a third.
How much has the pound moved against the dollar historically?
On Federal Reserve monthly averages, the pound fell from about $2.42 in October 1980 to about $1.09 in February 1985. It then rose to about $1.96 by November 1990 and to about $2.07 in November 2007. It dropped to about $1.13 in September 2022 and averaged about $1.35 in August 2026.
Should I hold my retirement savings in the currency I spend?
Matching assets to expected spending reduces currency risk, especially for the first years of retirement. For US persons it is limited by tax: IRAs cannot be converted without withdrawals, and UK funds are generally PFICs. The right balance depends on where you will live, your income sources and tax, so take advice.
How much does it cost to hedge dollars back to sterling?
The cost or benefit depends mainly on the gap between UK and US short-term interest rates, plus fees. When the two countries’ rates are close the cost is small; when they are far apart it can be significant, and it changes as rates move. Hedges are usually rolled every few months and do not fix the rate for a whole retirement.
Do Americans pay US tax on currency gains from spending pounds?
Generally not on small amounts. Gains from disposing of foreign currency in a personal transaction are not recognised unless they exceed $200. Losses on personal transactions are generally not deductible. Larger events, such as repaying a sterling mortgage or selling a UK home, can create taxable dollar gains.
Can I have a UK capital gain when my US shares made no gain in dollars?
Yes. HMRC converts the cost at the exchange rate on the purchase date and the proceeds at the rate on the sale date. If the pound has weakened in between, shares sold for the same dollar amount show a sterling gain. If it has strengthened, a dollar gain can become a sterling loss.
Are currency gains in a UK bank account taxable?
Not for UK capital gains tax. Since 6 April 2012, foreign currency bank accounts held by individuals give rise to no chargeable gains and no allowable losses. For US persons, a sterling account is a foreign currency, and withdrawals for investment rather than personal use can produce ordinary exchange gains or losses.
Sources
- Federal Reserve Bank of St. Louis (FRED) — U.S. Dollars to U.K. Pound Sterling Spot Exchange Rate, monthly (EXUSUK), source: Board of Governors of the Federal Reserve System, H.10 (accessed September 2026)
- Federal Reserve Board — H.10 historical rates for the U.K. pound (accessed September 2026)
- IRS — Yearly average currency exchange rates (accessed September 2026)
- IRS — Foreign currency and currency exchange rates (accessed September 2026)
- Bank for International Settlements — Covered interest parity lost: understanding the cross-currency basis (BIS Quarterly Review, September 2016) (accessed September 2026)
- US Code — 26 USC 988, Treatment of certain foreign currency transactions (accessed September 2026)
- US Code — 26 USC 165, Losses (accessed September 2026)
- IRS — International Practice Unit: Character of exchange gain or loss on currency transactions (accessed September 2026)
- IRS — Topic no. 701, Sale of your home (accessed September 2026)
- HMRC — Capital Gains Manual CG78300, Foreign currency: introduction (accessed September 2026)
- HMRC — Capital Gains Manual CG78310, Foreign currency: assets acquired or sold for currency (accessed September 2026)
- HMRC — Capital Gains Manual CG78321, Foreign currency bank accounts from 6 April 2012 (accessed September 2026)
- GOV.UK — Capital Gains Tax rates and allowances (accessed September 2026)
- HMRC — RDRM31190, Foreign income and gains: exchange rates (accessed September 2026)
- IRS — Questions and answers on the net investment income tax (accessed September 2026)