Capital Gains Tax, and why legal tender is different

The tax that only arrives when you let go

Most tax in the UK is met on the way in. Income tax comes off a salary before it lands. Tax on a pension or on dividends is often handled before the money reaches you. You rarely have to think about it.

Capital Gains Tax is different in shape. It is not charged on what you earn. It is charged on the growth in value of things you own, and only at the moment you part with them. You can hold an asset for thirty years, and if it grows in value over that time, you still owe nothing while it sits with you. The charge is triggered by the parting, not the holding.

Three ideas carry the whole thing.

The base cost

This is what the asset cost you. Usually the purchase price, together with the incidental costs of acquiring it, such as a dealer's commission or a professional valuation fee. The incidental costs of selling are allowable as well, and are set against the proceeds when the gain is worked out. If you inherited the asset rather than buying it, the base cost is normally its market value at the date of death.

The disposal

This is the moment you part with the asset. A sale is the obvious case, and it is not the only one, as the next section explains.

The gain

Subtract the base cost from what you received. What is left is the gain. If the result is negative you have a loss, which can generally be set against gains elsewhere.

Gains are then totalled for the tax year. HMRC sets an annual exempt amount, a level of total gains you can realise in a year before any charge arises. It is reviewed by government and has changed repeatedly over the years, which is exactly why no figure appears on this page. Gains above that amount are taxable, at rates that depend on your other income and on the type of asset, and are reported to HMRC, usually through Self Assessment.

That is the machinery. It applies to a second property, to shares held outside an ISA, to a valuable painting, and to gold bullion. With one significant exception.

A disposal is wider than a sale

People are often caught out here, so it is worth being precise. A disposal is any parting with the asset, not merely an exchange of it for money.

• A gift is a disposal. If you give an asset to your adult child, you are treated as having disposed of it at its open market value on that day, even though no money changed hands. The gain is calculated as though you had sold it at that value. Gifts between spouses and civil partners living together, and gifts to charity, are treated differently.
• An exchange is a disposal. Swapping one asset for another is two things at once: a disposal of what you gave up, and an acquisition of what you received.
• A part disposal is a disposal. Selling half a holding disposes of half of it, and the base cost is apportioned accordingly.
• Compensation can be a disposal. If an asset is lost or destroyed and you receive an insurance payment, that receipt is generally treated as proceeds.

The gift case has a practical tail to it. Because the disposal is treated as happening at open market value, somebody has to establish what that value was on the day the asset changed hands, and that is far easier to do at the time than several years later. If you give away a chargeable asset, write down the date and keep evidence of what it was worth then.

Assets passing on death are not treated as disposals for Capital Gains Tax purposes. Inheritance is governed by a separate set of rules, covered later in the Academy.

The practical point is that a plan of the form "I will never sell, I will simply pass it on during my lifetime" does not sidestep the charge. Under the ordinary rules, handing something over is the event.

Why UK legal tender gold coins fall outside the charge

Capital Gains Tax applies to assets. Sterling currency is not treated as an asset for this purpose, which makes intuitive sense: nobody is expected to calculate a gain on a twenty pound note.

A UK legal tender coin is sterling currency. You met the face values in the previous lesson: one pound on a full sovereign, one hundred pounds on a one ounce Britannia. What matters here is what those figures are. They are the coin's denomination as money, struck by the Royal Mint under the Coinage Act, and they are part of what makes the coin legal tender in the United Kingdom.

The consequence is structural. Because the coin is British currency, disposing of it is not a disposal of a chargeable asset, so no gain falls within Capital Gains Tax. It does not matter how much the gold in the coin has risen in value. It does not matter how many coins you sell, or in what year, or how large the total is. The annual exempt amount is left untouched, and the question of a threshold simply does not arise, because the charge never engages in the first place.

Read alongside the previous section, that is a wide result. A sale is outside the charge, and so is a lifetime gift of the coins, and so is an exchange of them, because in each case the thing being parted with is sterling currency rather than a chargeable asset.

It is worth being clear about where this comes from. It is a direct consequence of what the object legally is, built into the coin itself rather than claimed, elected or applied for. A sovereign is a pound coin that happens to be made of gold, and the tax system treats it accordingly.

Coins in this category include the sovereign and its half, quarter, double and five pound versions, the gold Britannia in each of its sizes, and other Royal Mint legal tender gold issues such as the Queen's Beasts, Tudor Beasts and Lunar series. One qualification worth knowing: HMRC's published guidance treats sovereigns minted in 1837 and later years as UK legal tender for this purpose, so much older pieces should not be assumed to sit in the same position.

VAT follows a separate logic again, and how it applies to investment gold is the subject of the next lesson.

What remains chargeable

The exemption is narrow and specific. It attaches to the coin's status as British currency, so anything without that status is treated like any other asset.

Gold bars and wafers are not currency. They carry no face value and no denomination, however pure and however well refined. Gains on them fall within the ordinary Capital Gains Tax rules.

Foreign coins are the case that surprises people most. A Krugerrand is legal tender in South Africa. An American Gold Eagle is legal tender in the United States. A Canadian Maple Leaf is legal tender in Canada. Each is a real coin with real monetary standing, just not British monetary standing, and it is British currency status that the UK rule turns on.

Two identical ounces of gold, one in a bar and one in Britannias, can therefore sit in the same safe, rise by the same amount, and be treated very differently on the day you sell.

Records worth keeping for chargeable gold

If you hold bars, wafers or foreign coins, the burden of proving your base cost sits with you. Gold is often held for a long time, and paperwork drifts, so the habit is worth forming early.

• The purchase invoice for every acquisition, showing the date, the price paid, the quantity, the specification and the seller.
• The incidental costs of buying and of selling, since these generally form part of the calculation. Ongoing costs such as storage fees usually do not.
• The disposal paperwork, showing the date, the price received and the buyer. If the disposal was a gift rather than a sale, keep your evidence of the market value on that day in its place.
• A running note of the holding, because identical items bought at different times and different prices have to be matched against a later sale in a consistent way, and selling part of a holding uses up only part of the cost. It is a mechanical calculation, and an accountant will want the underlying dates and figures to do it.

Holders of UK legal tender coins keep purchase records too, for insurance, for valuation, for probate and for their own peace of mind. The difference is that those records are not being kept for a tax computation that will never be required.

Gold inside a pension or an ISA

Everything above describes gold owned directly: coins and bars you buy, hold in your own name, and could put in your hand. The obvious follow up question, and it usually arrives at exactly this point, is whether the same metal can be held inside a pension or an ISA instead.

The short answer is that it becomes a different subject. Gold held through a wrapper is governed by the rules of that wrapper rather than by the rules set out in this lesson, and three things change at once.

• What may be held. Each wrapper sets conditions on which assets qualify and in what form, and the individual scheme or provider applies its own rules on top of those conditions. What a particular wrapper will accept is a question for that provider.
• Who holds it. An asset inside a wrapper is generally held by or through the scheme rather than by you personally, which changes the practical questions of custody, insurance, access and what you can do with it.
• How it is taxed. Wrappers carry their own treatment on the way in, while the asset is held, and on the way out. The position described in this lesson belongs to the coin in the hands of a direct owner, and the two should not be assumed to work the same way.

All three depend on the wrapper and on your own circumstances. If it is something you are considering, put it to a regulated financial adviser, or to your scheme administrator or ISA provider, before assuming anything either way.

Where your own circumstances come in

The exemption described here is a feature of the coin, not of the person, and the surrounding rules do depend on your circumstances. It is framed for UK residents, and residence, domicile and the reason you hold the gold can all matter. If HMRC judged that someone was trading in gold as a business rather than holding it as an investment, a different set of tax rules would apply to the profits.

More broadly, buying physical gold is not a regulated investment activity in the United Kingdom. There is no Financial Services Compensation Scheme cover and no access to the Financial Ombudsman Service if things go wrong, and the value of gold can fall as well as rise. Nothing in the Academy is financial advice.

Tax treatment depends on your individual circumstances and can change. Nothing here is tax advice, and anyone with a holding of any size should take their position to a qualified accountant or tax adviser before acting on it.