The impact of Capital Gains tax on gold bullion
By StoneX Bullion
In a fragile global economy, the value of the commodity market and in particular gold and silver has risen rapidly, with many investors seeking a safe haven for their cash. Gold has long been regarded as the perfect hedge for a falling dollar, with its fortunes diametrically opposed to the currency market. As confidence in the fiat money system wavers, more tangible assets become far more attractive with gold at the top of the most-wanted list. However, this doesn't mean that investing becomes a straight forward decision because there are countless ways to take advantage of the boom in the price of the yellow metal. For those who want to speculate directly on the potential price there are futures and options, whilst gold ETFs and mutual funds are a more convoluted way of riding the increase in value. Investors could also consider whether to buy shares in a gold mining company, as the price of the commodity rises, the value of the stock should rise in tandem – not withstanding any other significant company events or factors such as board resignations and appointments or political upheaval. All of the above offer very valuable ways in to the gold market and your final choice will depend on your personal preferences and also your experience. But if you would like a more palpable investment, there is one more option we haven't yet mentioned: gold bullion. Gold bullion is the stuff films are made of; recent blockbusters such as The Hobbit and Harry Potter featured scenes with heaps of sought-after gold coins. Yet bullion is not just a fantasy investment. More and more people are turning to this type of tangible asset because of its very real advantages compared to other types of gold investments. Capital Gains Tax is one area where gold bullion stands head and shoulders above the rest; we take a look at the impact of CGT on bullion compared to other types of investment.
What is Capital Gains Tax?When you calculate the possible gains on any investment compared to the potential losses, it's essential that you take Capital Gains Tax into account. CGT is a levy which eats away at the profits you make, claiming a share of any gain you make. It's applicable in a whole host of situations, including when you both sell or give away an asset which you made a gain on. It applies to vast arrays of types of asset, whether they are in the UK or overseas, as long as you are a UK resident. There are a few exceptions, most notably your car and your home (usually but not always) plus some types of personal possessions such as jewellery and artwork but only up to the value of £6000 (current HMRC limit correct at time of writing). Stocks, shares and other investments are all liable to CGT unless they are a specific tax-efficient vehicle, such as an ISA. The rules around CGT are complex, as there are some reliefs which you may be able to claim, as well as losses to offset. There is also an annual tax-free allowance (a similar concept to the personal allowance for Income Tax) which applies to most people. For the 2013/2014 tax year the Annual Exempt Amount was set at £10,900 for the majority of people. Without taking any of the reliefs or exemptions into account, the rates for CGT ranges between 18-28% (depending upon your total taxable income). Now we've examined exactly what CGT is and how it has the potential to decimate your profits, we will take a look at what rules apply to gold bullion.
Gold bullion and CGTAs an investor, it is your responsibility to ensure that you calculate and declare the right amount of CGT due; ignorance is not an excuse which will be viewed as acceptable by HMRC. In many cases, you may well require assistance from an accountancy expert as there are a large number of variables which can influence exactly how much you have to pay. Remember it is the However, if you are holding gold bullion, you may find yourself in a somewhat simpler situation depending on what you have chosen to invest in. Bullion is a term that can be used to refer to any kind of tradable precious metal, including ingots, bars and coins. It can be used to describe various precious metals in addition to gold. As a general rule, bullion is subject to the same CGT as other forms of investment, and doesn't provide any advantage over digital or paper holdings such as EFTs or shares. But there is one exception which could transform the profitability of your trading: legal British currency. If you opt to hold your physical gold investment in coins which are also recognised as a legal form of British currency, CGT ceases to apply. This is despite the fact that this type of bullion is as valuable and easily tradable as foreign coins such as the Krugerrand. Britannia coins – either gold or silver – are technically acceptable as currency in the UK and as such fall outside of the CGT rules. This means you can trade in them without incurring a CGT liability regardless of the amount of profit you (hopefully!) make. In case you were wondering the value in terms of currency, one gold sovereign is considered to be valued at an equivalent of £1. To make it crystal clear: gold bullion held in the forms of bars or ingots, or coins in a foreign denomination will be subject to CGT. It is only the silver and gold Britannia coins which can enjoy this tax loophole. More specifically, because it is only legal tender currency which enjoys this tax efficient status, it is gold and silver sovereigns minted from 1837 onwards as well as Britannia’s. The British Gold Sovereign is in fact considered a semi-numismatic coin; although its intrinsic gold value is high it also has the honour of being one of the most widely-traded and owned gold coins in the world. Coupled with its CGT advantages and its divisibility which offers extreme flexibility for buying and selling, its continued popularity is hardly a surprise. One final note: in the UK gold coins are VAT-exempt providing they are investment-grade which is set at between 0.90 and 0.9999 fineness (according to the EU Gold Directive 2000). The British Gold Sovereign meets this VAT exemption as it is set at a fineness of 0.916 (classified as 22 carat gold).
CGT treatment of other coin bullionAlthough it is only legal tender coins from 1837 onwards that can enjoy the CGT exemption, there is another loophole for UK coins minted prior to this date which have now been de-monetised. UK-issued coin bullion only minted pre-19837 is not considered currency and is not classified as such. However, for CGT purposes it is dealt with under chattels which also carry an exemption up to a certain limit. This exemption is currently set at £6000 per coin but care needs to be taken if you are selling a set. The HMRC criteria is somewhat grey around groups of coins being sold together and if they can be considered a set, the chattels exemption limit applies to the whole group, not each individual coin. Coins issued abroad will not fall under the chattels exemption, and will be dealt with according to the full CGT rules.
ConclusionPhysical gold bullion provides some protection against disintegrating values in the currency system and allows investors to retain some control over their assets without being unduly influenced by government monetary policy, unlike currency which can be devalued to prop up an ailing economy. Although British Gold Sovereigns are classified as currency for CGT purposes they are sold as investment grade gold so their worth is not diminished by changes in the value of sterling. Having a diverse portfolio is always a good idea but it's important to be aware of how much you could potentially lose to CGT. A great way to combat this is to hold a combination of physical gold in both UK and foreign coins. Selling the UK legal tender coins will not affect your CGT status and by ensuring the trades you carry out in foreign currency remain under the exemption limit, you can avoid losing almost a third of your profit. The above guide is only intended to provide an introduction to Capital Gains Tax and the treatment of gold bullion; seeking advice from an accountant or professional on your own individual tax position is advisable before proceeding.