Living in a society and consuming the services offered by it, from political leadership to bin collection requires the payment of taxes. Income tax, capital gains tax, national insurance, VAT, fuel duty and a raft of duties on luxuries like cigarettes and alcohol all swell the coffers of the government. These taxes fund the services a government provides to its population.
Of course, it is illegal not to pay taxes, but it is also a moral imperative to contribute to the society in which you are a part. Governments tread a fine line between requiring people to pay too much or too few taxes. The outcome of the former is demotivation, emigration, and business relocations, while the latter may lead to lawlessness and a failed society. And while tax evasion and tax avoidance are anathemas, there are many legitimate and legal ways to protect your assets from tax erosion.
Future tax rises
The Covid 19 pandemic has forced governments around the world to shore up stalled economies with large financial support packages which are being financed through debt. We need to remember that all this additional debt is just a decade on from the slow and austere recovery of the 2010 financial crisis. This new wave of public borrowing will need to be paid for, Most likely through rising taxes and in time, austerity measures.
Should these measures get implemented, it is possible to prepare for this eventuality with savvy investments that allow some of your hard-earned assets to be acquired and disposed of tax-free.
Taxed and tax-exempt investments
Most common assets are liable for taxes. Any interest on savings earned, dividend income from shares, or rental income from property will incur income tax at a rate commensurate with your income. In addition, many assets will also incur capital gains tax, the tax paid on profit made from purchase to sale.
Large assets like property are subject to capital gains tax if they are buy-to-let investments or business premises. Capital Gains Tax is also due on shares, personal assets above £6,000 and business assets.
There are some notable exceptions to assets that don’t attract capital gains tax. ISA’s or individual savings accounts are capital gains tax-free and do not attract income tax on interest or dividends received. Other government-backed schemes like National Savings & Investments are also tax-free. However, the current very low interest rate means these savings vehicles don’t promise a very competitive rate of return.
There are also certain schemes like the Enterprise Investment Scheme which encourages individuals to invest in start-ups and early-stage businesses by offering tax exemptions. Classic cars, antique clocks and some fine wines are also exempt from capital gains tax which makes them a popular choice for collector investors.
In addition, some types of gold are exempt from both VAT and Capital Gains Tax. Until 20 years ago, gold attracted value-added tax in the same way as other goods and services did. This changed in 2000 when the UK government harmonised the tax treatment of physical gold with the rest of the EU.
This recognition of the precious metal as an investment asset on a par with stocks and shares, and gave investors a comparable alternative safe-haven option. The stipulation remains that only investment-grade gold is VAT exempt. This means the gold must be of a particular type (specific bars or coins) and of a minimum standard of purity
Other advantages of gold investments
The tax implications of the precious metal are an obvious advantage for investors. Assuming tax is payable on other investments, it is perfectly reasonable to invest a proportion of your investment portfolio in tax-free gold, without losing the moral ‘tax’ high ground. This is also because there are many other advantages to owning gold that are beneficial to a portfolio quite aside from the tax implications.
Demand for gold is high and the precious metal is very liquid. This means it retains its value and can be quickly and easily sold when you need to liquidate it. This is an important distinction to make as some tax-free assets like property, cars or antique clocks may be much more difficult to sell.
Gold is a physical and non-perishable asset that requires no upkeep. And its inverse relationship to other assets means it is often used as a hedge against the volatility and uncertainty in the markets.
The recovery from the economic turmoil caused by the COVID 19 pandemic will be long and slow. Even the IMF believes the coming downturn could be worse than the great depression of the 1930s. The government and the society in which we all participate will need tax receipts to aid this recovery and we have a moral and legal duty to contribute.
That said, gold is usually only a part of a wider portfolio of assets, bought by people who pay their dues in many other forms. As a prudent investment that will help protect assets amidst the current and future uncertainty, investors can buy the tax-free metal with impunity.