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How can gold protect you from Capital Gains Tax increases?

Rumours of significant Capital Gains Tax increases have spooked the investment market. But gold could be the answer to shield you from imminent tax rises.

UK’s rising debt

Getting the UK’s burgeoning debt under control has been a primary focus for recent Conservative Governments. Austerity measures have aimed to reduce UK PLC’s growing debt problem, despite its impact on large swathes of the population. UK Public sector debt (excluding public sector banks) has now exceeded £2 trillion for the first time. July’s level of £2,004 billion was a staggering £227.6 billion more than at the same point the previous year.

Furlough scheme extended to March and beyond

Chancellor Rishi Sunak has been praised for his speedy and decisive response to Covid-19’s impact on individuals and companies to work. A wide-reaching Furlough scheme has targeted those unable to work due to Covid-imposed restrictions. The scheme has evolved both in breadth, to cover more sectors like the self-employed, and in duration. Initial timeframes have been extended as we’ve entered the inevitable second wave of the virus and another national lockdown.

Need to tackle growing Government debt

But for a Government so focussed on balancing the books, this vast sum of debt has put a massive spanner in the works. Debt as a percentage of GDP has now reached parity after levelling off at around 80% from 2015 to 2019. With the virus still raging and furloughing in full swing, the chancellor has already turned his attention to ways of reducing this mind-boggling national debt from next year onwards.

How can gold protect you from Capital gains tax increases?
(Daily Mail) UK Debt now at 100% of GDP

Experts suggest Capital Gains Tax could be key to reducing debt

The Institute for Public Policy Research has recommended raiding middle-class investors and entrepreneurs to help plug the leaky public finances.

Reducing or abolishing the Capital Gains Tax (CGT) tax-free allowance would increase the number of people paying the tax by up to 300%, plus the amount paid by those already affected by CGT.

The Treasury calculates that CGT could raise a whopping extra £90 billion over 5 years if aligned with income tax brackets. The tax is levied on gains made on sale of shares, second homes and the sale of businesses. But an annual tax free threshold of £12,300 means that many people escape the tax altogether due to modest profits, while shrewd investors can split sales across tax years to minimise impact.

Part of the planned changes would see this threshold reduced or even scrapped. Estimates are that reducing the allowance to £5k would double the number of people paying the tax and reducing to £1k would triple the amount.

Owning physical gold coins can reduce your tax bill to zero

As an investor or business owner, it’s important to take pro-active action to prepare for possible tax increases next year.

Whether you’re buying as an individual or from company profits, gold’s popularity as an investment has hit new heights in 2020. Primarily enticed by healthy returns in the gold price, investors are now also recognising the tax free benefits of certain gold coins.

How can gold protect you from Capital gains tax increases?
Owning certain gold coins can keep away the tax man

Which gold coins are tax free and why?

While all investment grade gold is VAT exempt, only certain gold qualifies as CGT free.

As a UK investor, selling gold bars or non-UK gold coins at a profit, could incur CGT if you make more than your allowance. But sticking to UK legal tender gold coins will mean any profits are completely free from CGT.

That’s because HMRC cannot tax individuals for gains made from selling its own legal currency. Coins issued by Royal Mint with a face value qualify as legal tender.

The two main choices are Gold Britannias and Gold Sovereigns. But The Royal Mint also produces more limited issue legal tender series such as Lunar coins and Queens Beasts.

These are the Royal Mint’s highest face value coin and weigh 1oz in weight. Gold purity is 999.9 / 1,000 parts gold and the most popular UK tax free coin for larger investors due to their low premiums. The 2021 version features high-tech laser produced security features, making it one of the most impressive bullion coins on the market.

Pre-owned Britannias are occasionally available and offer investors the chance of reducing premiums further. Britannias are also CGT free if bought in it’s fractional versions (half, quarter and tenth), or the silver version.

2021 Gold Britannia
The Britannia is our best selling investment coin

 

One of the world’s best known gold coins, the humble Sovereign also qualifies as tax free.

At around a quarter of the size of the Britannia, the Sovereign offers a more affordable route to gold for modest investors or more divisibility for those seeking flexible portfolios. The modern Sovereign has existed for more than 200 years, so it offers huge variety for investors and collectors alike. Best value Sovereigns offer the cheapest option, while historical editions from the Victorian era are more scarce, but expensive.

Half Sovereigns are slightly more costly per gram but appeal to those after smaller coins.

 

One of the most popular limited issue Royal Mint series is the Queens Beasts range of coins.

These are primarily 1oz 24 carat coins, although quarter ounce coins are also available. Limited to a series of 10, the coins’ stunning design is a major pull, but their limited issue quantity has also led to many of them increasing in value at a far quicker pace than other UK coins.

The White Greyhound of Richmond is the most recent and final issuance in the set. It currently trades at modest premiums, so could be a good bet if its value follows earlier coins upwards.

With the same £100 face value as Britannias, these coins also provide a tax free shelter.

white greyhound of richmond queens beast
Queen’s beasts are a stunning coin collection, with enhanced upside potential

Gold likely to offer high returns as a safe haven asset

With a lethal cocktail of high Government debt, increased taxes, high unemployment, recession, falling stock and property markets, weak currency and rock bottom confidence, 2021 and beyond looks like an economic nightmare.

But gold tends to benefit in these times, attracting investment from those seeking a safe haven. Indeed, gold has risen around 25% so far in 2020 as of mid-November. The previous gold bull run saw double digit rises every year from 2005 to 2011.

So gold isn’t just a way of shielding from capital gains tax, but also growing your savings.

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What is the Correlation Between Gold and Oil Prices? Has COVID-19 Changed this Forever?

It is becoming increasingly apparent that the COVID-19 crisis has caused unprecedented disruption in the markets. Accepted constants in the market have been broken, as the price of gold has skyrocketed, while other commodities have moved in different directions. For more than 2 ½ decades, the gold oil ratio has been around 15:8. In layman’s terms, this means that 15.8 barrels of crude oil are worth the same as a troy ounce of gold.

Back in 2005, this ratio dropped to 6:2 due to massive rises in the price of oil. But, apart from these periodic aberrations, the gold-oil ratio has more or less remained constant. Oil price volatility has also driven this ratio up to 47:6 in 2016. So, what happened in 2016? The price of gold rose by 6% to jump to $ 1127 per ounce. Oil prices performed poorly in that year, along with the stock markets, but the ratio was disrupted as gold prices continue to rise.

The price of crude oil is intrinsically linked to gold prices
The price of crude oil is intrinsically linked to gold prices

Why is the oil to gold price ratio so important?

The common umbilical cord shared by both gold and oil is the US dollar. Since both gold and crude oil are priced in the market in US dollars, there is a correlation between the two commodities. Gold is considered by many to be more than a commodity – a precious metal that locks in value provides insurance against inflation and other market forces and hedges unwanted market risks. Oil, on the other hand, is representative of the energy we use in a fossil fuels based world. This simply means that all countries in the world have to acquire monetary resources to buy oil to run their economies.

Apart from being dollar-denominated assets, the price of crude oil is an important influencer in the stipulation of gold prices, gold mining company stocks and ETFs. Due to their valuation in the same global currency, a rise in the US dollar usually means the fall of other dollar-denominated assets. In this scenario, investors are wary of purchasing these assets as they become more expensive. So, ideally, when the US dollar falls, gold falls, as it becomes more affordable due to their strong linkage.

Gold has delinked itself from oil prices in 2020
Gold has delinked itself from oil prices in 2020

Inflation is also linked to the price of oil and gold

Interestingly, there is another dimension to the problem. The rise of crude oil prices usually pushes up inflation. However, as we know, gold protects investors against inflation. The demand for gold, and subsequently its value also increases whenever there is a spike in inflation. So, now we can see the direct relationship between gold and oil prices. Gold does not behave like other dollar-denominated assets. The demand for these may plummet with the rise of oil prices, but gold, due to its inflationary protection attributes continues to remain attractive to investors when inflation is pushed up, due to oil prices.

Economic slowdown due to the increase in oil prices

Since all countries have to buy oil to fuel their economic growth, a rise in the price of oil slows down the economy. The domino effect that this has on industry dampens economic growth. Consequently, there is a fall in equity markets and investors move to gold. Once again, there is a direct correlation between the price of oil and that of gold. Recessionary phases like these can be lucrative for precious metal investors as they can book profits with the price of gold moving upwards. Surging oil prices can adversely impact the share price of mining companies, as well. Since oil is widely used in mining, rising oil prices squeeze the margins of these companies, resulting in a dip in their share prices.

PHYS01_Animated_Gif_2_MPU

So, what changed through 2019 and 2020?

At the beginning of 2019, the gold price ratio was 23:1, which was already high, but it rose further. Numerous factors affected the price of gold, resulting in significant increases. The world was already poised on the brink of a financial implosion that led to an avalanche.

Investors starting to move their investments to gold bars (with sizes such as 1oz, 100g and 1 kilo) and gold coins (such as gold Britannias and gold Sovereigns). Other factors responsible for the rise of gold were:

  • the economic uncertainty in Europe due to Brexit
  • increased government debt in most countries in the developed world
  • the US-China trade wars and
  • socio-political tensions across the Middle East and other parts of the world.

All of these factors also led to the volatility of the global stock markets, resulting in more demand for gold. The COMEX gold futures price breached the $1400 per ounce mark in June 2019.

Crude Oil Tanker
Crude oil remains the lifeblood of the global economy

How did the pandemic change the game?

For all practical purposes, 2020 is not a normal year. The oil crisis started with Russia and Saudi Arabia at loggerheads with each other regarding the future of oil. Russia had refused to ramp up production to keep oil prices up. The price war was eventually triggered in March 2020, when OPEC failed to stabilise the market. Saudi Arabia started dumping crude oil into the market at heavily reduced prices.

This resulted in the WTI crude going down by 24.59% and reached a price of $31.13 per barrel. These prices have never been witnessed since the Middle Eastern war, which took place in 1991. The global investment bank, Goldman Sachs cut back on its outlook on Brent oil for the second and third quarter of the year, reducing it to $30 a barrel, with indications that eventually prices are likely to be as low as $20.

Has COVID-19 changed the gold oil ratio forever?

So, here was a new trend with oil prices falling and the price of gold reaching its highest point ever to $2067 on 6th August 2020. As we have seen above, the price of gold falls along with the price of oil. However, COVID-19 was different. While oil was dumped at cheaper rates, global economic fears prompted investors to buy gold in the hope of protecting their wealth.

The 2020 fall in oil prices was not entirely linked to coronavirus, but a reduction in industrial demand for oil due to manufacturing output reduction was. As were corresponding drops in fuel usage by the public as they travelled less and also the reduction in worldwide travel also created a reduction in demand for oil.

The rise of gold was certainly linked to the implosion of the global economy caused by COVID-19. It would be premature to say that the gold oil ratio has changed forever. 2020 has not been a normal year. It may take a couple of years during the post-pandemic era for things to stabilise, but once they do, the correlation between oil prices and gold may revert to pre-2020 levels.

For more advice on buying gold at the right time, call Physical Gold

Our gold researchers continuously study economic trends related to the international gold markets. Many people believe that the current price of gold isn’t viable for them to make a purchase. To get the right advice on selling and buying gold and silver, call Physical Gold Limited on (020) 7060 9992 or contact us online. We would love to speak to you and impart the right advice on buying gold.

 

 

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