Gold Investment and Taxes

August 28, 2012

Whilst investment into gold offers a great hedge against the effects of inflation, and as a store of value in times of economic or political uncertainty is almost unbeatable, the investor will always have to bear in mind the tax – and type of tax – that he will have to pay.

These taxes will depend upon what financial instrument has been invested in, and may also depend upon the investor’s marginal rate of tax and style of investment. Here we look at the different types of investment into gold that might be made, and what taxes may have to be paid. You should remember that these taxes, rates, and allowances, are subject to change at any time by the UK government, so it is always wise to make a check of tax liability one of the standard research searches you conduct before buying or selling an investment product.

Physical Gold

There is no income payable on holding gold, and so an investor would have no income tax liability. And nor is there any VAT chargeable on investment gold.

However, the investor is subject to capital gains tax in the same way as when holding shares. Gains should be declared and such gains will be subject to the annual CGT allowance before taxed at the applicable rates according to total taxable income. There is an exception to this rule, and that is if the investor has bought CGT exempt products. These include gold Britannia coins, gold sovereigns, including proof sets, and one, two, and five pound gold coins. All bullion bars are subject to CGT.

Shares

When you buy shares on a stock exchange you will be charged a 0.5% Stamp Duty Relief Tax (SDRT). This is automatically added to your contract and paid as part of the transaction.

While you are holding shares, any dividends paid will be subject to income tax. These are taxed at 10% at source. Although this 10% cannot be reclaimed, it can be offset against your full tax liability if you pay tax at a higher than basic rate of taxation.

Upon selling your shares, you will be liable to pay capital gains tax (CGT). The calculation of CGT liability is an annual process, and allows the offsetting of losses against profits. Any gain is then considered against the capital gains tax allowance (in 2012/ 13 this was £10,100), and any amount over this is taxed according to your taxable income and tax rate.

You can help this tax position by investing your shares through an ISA (individual savings account). An ISA is a tax efficient wrapper which allows you to hold cash, or shares within it. In 2012/ 13, a UK resident could invest up to £11,280 in an ISA. All capital gains and dividend income is free of extra tax liability if the shares are held within an ISA wrapper.

ETFs are generally treated as the equal of the shares of publicly quoted companies, but their individual tax treatment may depend upon the domicile of the fund itself. Most can be invested in within an ISA, but an investor should always check with his stockbroker the tax standing of the individual ETF in which he wants to invest.

Options

The taxable position of profits made from options is a little more complicated than those made from investment into shares. The tax position depends upon whether the investor is a holder (buyer) of an option, or a writer (seller).

A holder will pay no tax unless the option expires, or is sold, or he is exercised against. If the option expires, it is treated as a sale for tax purposes, and the purchase cost can be written off against other gains. If the option is sold, then it is treated in exactly the same way a sale of shares would be: a loss can be written off against other profits, while a gain will be subject to CGT. If the option is exercised by the holder, then all costs associated with the option can be classed as costs of investment and offset against the capital gain for tax purposes.

A writer of an option is paid a premium. This will not be taxable unless the option expires or is exercised, in which case it is treated as a capital gain.

Trading in shares and options

An investor who hedges stock investment positions with the use of options will need to seek specialist tax advice as the rules can become very complicated. Tax rules also depend upon how an investor is viewed; if, for example, an investor trades more than 20 hours per week, then this may be considered as an investment business and a job of work, and the Inland Revenue will tax you accordingly.

In conclusion

The tax that an investor will be liable to depends upon the type of investment and the type of gain made. Generally losses can be offset against profits when calculating liability to tax. Tax payable may also depend upon the length of time an investment has been held, and is calculated on an annual basis. Some investors will sell assets over a tax year end to ensure that they receive maximum benefit from two years of capital gains tax allowances, or even sell an asset on the last day of a tax year and then repurchase on the first day of the following tax year to gain the maximum benefit. Of course, the costs of rolling over a position in such a manner have to be calculated when considering such an option.

The overriding rule when considering taxation of any investment, including gold, is to take expert advice from either an accountant or the HMRC itself.