The chancellor Rachel Reeves just announced an increase in Capital Gains Tax at her inaugural budget on 30 October, so how can you invest without having to pay almost double the previous rate on investment profits? The answer is gold coins.
Physical gold is recognised as a tax efficient investment because it can be both VAT-free and capital gains tax exempt. The VAT exemption on investment-grade gold only came into force in 2000, but the CGT exemption has been around for much longer. So why don’t we pay capital gains tax on physical gold when most other types of investments attract the tax? The answer lies in its historical role as a form of currency.
Which gold is CGT-free?
Not all gold bullion is free from capital gains tax. You will still pay the duty on gold bars and gold coins minted by other international mints. But any profits made from the appreciation in value of coins minted by the Royal Mint are not subject to CGT, depending on individual circumstances. This includes the popular Britannias, Sovereigns and Queens Beast ranges of gold coins, which come in different denominations.
Royal Mint-minted coins retain this status because they are considered legal tender. Legal tender gold coins are classified as currency rather than as collectibles or investments. As a result, they do not fall under the same tax regulations that apply to other investment assets, such as shares or properties, which can incur capital gains tax when sold at a profit.
Why is currency treated differently?
The origin of the exemption from capital gains tax (CGT) on legal tender in the UK can be traced back to historical and legal frameworks surrounding currency and taxation.
Legal tender refers to money that must be accepted if offered in payment of a debt.
Governments have traditionally issued currency that is backed by their authority, so it is a standard medium of exchange. Historically, gold and silver coins were commonly used as currency, so they were treated as legal tender. As currency systems evolved, the gold and silver was regulated by governments, which often meant they were not taxed like other forms of capital.
Currency is fundamentally a medium of exchange, designed to facilitate trade and transactions. When currency is received in a transaction, it is accepted at face value which reflects the purchasing power established by the issuing government. Imposing taxes on currency transactions would disrupt this system. It would be impossibly complex to tax currency by tracking the tax implications of every transaction.
By not taxing currency, governments encourage liquidity in the economy. Individuals and businesses are more likely to spend, invest, or circulate money if they don’t face additional tax burdens on transactions.
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The history of capital gains tax
The UK introduced capital gains tax in 1965 to tax the profit from the sale of certain assets, like property and stocks. However, the legislation made distinctions between different types of assets. Stocks, bonds, mutual funds, and other investment vehicles are subject to CGT, as are collectibles like antiques, artwork, and rare coins. Property is subject to CGT but only if it is not your primary residence. Legal tender was specifically excluded from this list because the government aims to separate currency as a tool for trade from assets that appreciate in value.
Recognizing the role of currency in the economy, the government decided that profits from the sale of legal tender (gold and silver coins) should not be subject to CGT. This decision was rooted in the idea that taxing currency would disrupt its function as a medium of exchange. Even though we don’t use gold coins to pay for goods directly anymore, the legacy of its legal tender status still underpins its tax exemption.
The UK government also wanted to encourage investment in gold as a means of wealth preservation. It went one step further in 2000 by exempting investment-grade gold from VAT as well to bring it in line with other VAT-free investments like stocks and shares and harmonise with the rest of the EU which did not charge tax on gold. The VAT exemption applies to other forms of investment-grade gold, including gold bars, but because these are not legal tender, they do still attract CGT.
Changes to the capital gains tax regime
Until 2024, the threshold for realising capital gains (selling an asset and making a profit on it) before tax was £6,000. This meant any profit above that amount was subject to capital gains tax at 10% for basic rate taxpayers and 20% for higher rate earners. This threshold was lowered to £3,000 in April 2024 which increases any tax burden for assets that generate more than £3,000 profit when sold.
The most severe change came at the new Labour government’s first budget on October 30, when the rate of capital gains tax payable on profits above £3,000 rose to 18% from 10% for lower rate taxpayers, and to 24% from 20% for those paying the higher rate of tax. The changes were part of a massive tax rise that is designed to raise a further £40 billion for the UK coffers.
Conclusion
The lowered threshold and higher tax rates have greatly increased the burden of capital gains tax and investors should consider investing in assets that minimise this.
The tax-free status of UK gold coins, particularly those recognized as legal tender, reflects a combination of government policy, the nature of the coins as currency, and the intent to encourage investment in precious metals. This feature makes them an attractive option for individuals looking to preserve wealth and diversify their investment portfolios without the burden of capital gains tax.
