Gold Bullion
investment is distorted and discouraged by the UK tax system. Why...?
A BRITISH SOVEREIGN Gold Coin is within
HMRC's definition of investment gold, writes Paul Tustain, founder and
CEO of BullionVault. But
would a new one pass the tests of fairness which government rightly demands
of the investment industry?
Probably not. This coin retails from the Royal Mint for £495 on a day when
its Gold Bullion
content is worth £244.78. Sovereign gold costs more than twice its real
value. It is a wonder they can sell sovereigns at all, but they can, because
of a tax anomaly. There is no capital gains tax on legal tender, and the
sovereign – worth £244.78 in gold – has a nonsense legal tender value of £1.
The tax status of a sovereign rests on your infrequently exercised right to
pay with one in Poundland.
This is not the only tax anomaly around gold. Long-term owners of real gold
see a rising apparent value but devaluation flatters to deceive, and they end
up paying capital gains tax on inflation. Meanwhile, here we are in the midst
of a financial crisis caused by derivatives, yet, amazingly, the most common
gold derivative for UK investors – the spread bet – is tax free.
It is a strange distortion which encourages leverage, disadvantages the dull
business of saving, eliminates potential government revenue and is probably
acting against the long-term national interest.
For the time being, London remains the world centre for professional bullion
trading, thanks to its time-zone advantage and its unique infrastructure and
expertise. Gold
Bullion turnover in the London market averages more than $240 billion per
day, which is deeper liquidity for buyers and sellers than all but the four
most heavily traded currency pairs worldwide. So, in spite of the ill-advised
disposal of half the British gold reserve 12 years ago, we remain, for the
moment, at the centre of world gold trade.
But we are losing ground. Already the emergence of a Far Eastern kilobar
market is attacking the dominance of worldwide 400-ounce loco London bullion
settlement. The increasingly profitable trade is to ship unwanted 400oz bars
from London to the Swiss refineries, convert them to kilobars and freight
them to Shanghai, where a premium awaits. What drives this trade? It is the
relative attraction of real bullion in Asia and the opposite relative
attraction of derivatives in London. Tax asymmetry is partly to blame.
Zurich, Hong Kong, Mumbai, Shanghai and Singapore have all detected the UK's
ambivalence to physical metal, and they are jostling for position, building
vaults and repatriating reserves from London. They know that financial
markets cluster around gold, and that gold markets need deep leasing
liquidity, made possible by large stocks. Running the world's gold market is
a big prize, and it is not something which London wants to lose carelessly.
Can we reverse London's diminishing status? Yes, it is easy, and we can
straighten out a number of problems all at once.
Gold has once again proved itself in tough times and is about to regain Basel
3 tier 1 capital status, making it very useful to banks. So make private gold
deposited at the Bank of England free of capital gains tax. This would
dramatically increase the financial firepower of the bank at a time when our
commercial banks need support, as might our currency very soon.
Then, to make it sufficiently attractive for private money, enact a right to
convert that deposited gold into sovereigns, subject only to seigniorage
(coin production tax). If the Royal Mint cannot do this much cheaper than it
currently does then break its monopoly, which will quickly eliminate that
100% premium and get a better deal for everyone.
Privately owned gold will then take one of two routes. It will either support
the financial strength of the Bank of England and, through this support, our
banking system, or it would exit the vaulting system to private possession as
a fairly priced gold coin, generating tax revenue where — because of the
absurdity of tax-free spread bets — none is currently generated.
Private savers will no longer suffer an iniquitous tax on inflation simply
through holding real gold. Their new status would be closer (and fairly so)
to tax-exempt pension savers, but their wealth would be both reversing the
current Gold Bullion
stock depletions from London and supporting British financial strength with
Basel-approved capital. Pension savings do not do this.
The Treasury would benefit, and London's primacy in bullion marketplaces
would be supported with private, not public, money placed there freely and by
investor choice.
Finally, there is also a significant insurance benefit. We do not know if
there is a route out of a £1tn national debt. Some hope there is; we cannot
help thinking otherwise. Suppose we are right: gold will better underpin a
future currency system than will betting slips.
So that is consumer choice widened, a level playing field for tax created, a
pillar of London's financial services marketplace supported, increased
revenue for the Treasury, increased financial strength for both the central
bank and the currency – present and future – and an expensive monopoly
broken.
This is our modest proposal.
BullionVault is the world's
largest provider of physical gold to private investors online. Launched in
2005, and now caring for $2bn in property belonging to 39,500 people, it
gives private individuals access to the prices and safety of the professional
gold and silver bullion markets.
The company was instrumental in the introduction of gold bullion into
private pensions in the 2006 Finance Act. In 2009, it won the Queen's Award
for Enterprise: Innovation. In 2011, it entered the Sunday Times
Top Track 250 of Britain's largest private companies. It is a full member of
the London Bullion Market Association and is uniquely well placed to observe
the steady overseas drift of privately owned bullion. BullionVault offers both Zurich and
London vaulting options at the same price and sees three times the demand for
Zurich storage over London.
A version of this proposal appears in the Parliamentary Yearbook 2012, published to coincide with
May's State Opening of Parliament by HM Queen Elizabeth II.