The best ways to invest in gold

Gold coins © Getty Iamges
Gold Britannias are free of capital gains tax

Today we’re talking gold.

I’m not going to make projections about the price – whether it’s going to go up or down.

Instead we’re going to look at the cost of buying and selling it…

How to buy gold on the cheap

What’s the easiest, cheapest way to buy gold?

Most would say via one of the gold exchange-traded funds (ETFs). You buy the ETF through your broker, the same way you would buy a share. You pay a small premium to the spot price of gold, and a small annual percentage to cover storage and other related costs.

ETFs really are brilliantly simple. It is because they’re so convenient that ETFs have become the means by which most investors and – perhaps more importantly in the financial scale of things – most institutions buy gold.

Almost as convenient is to open an account with one of the online bullion dealers – the likes of GoldMoney, Goldcore or Bullion Vault. You pay a small premium to the spot price of gold and storage costs are low.

The overall costs are usually marginally higher than ETFs (although in some cases they are lower), but many investors prefer the online bullion dealer route because they feel the gold that they buy is “theirs”. The gold bars are specifically allocated to them and they can take delivery, if they so choose. I should stress it is also possible to take delivery via some ETFs, but the process is more cumbersome.

I have used both methods, and they both have their advantages and disadvantages. Online bullion dealers are great – and this is a growth business – but the most gold bought and sold by investors is held with the ETFs, because institutions prefer them.

Competition between ETFs and bullion dealers has conspired to drive down prices, much to the benefit of the consumer. But there is one huge cost that neither of these methods is able to avoid – tax. This assumes you’re not buying your gold via an ISA or a SIPP, which it is, for the most part, possible to do via ETF or bullion dealer.

Capital gains tax (CGT) currently stands at 20% in the UK for higher rate taxpayers and 10% for lower. Funds don’t pay CGT. It is paid by the investor when they sell or redeem, assuming they made a profit. It kicks in once you have made profits of more than £11,100 in a year (£11,300 from next tax year).

So over and above that level, you’re facing an unavoidable 10% or 20% cost for buying and selling gold at a profit. It used to be 18% or 28%. We have George Osborne and his team to thank for lowering it – but even at current rates, it’s a considerable dent to profits.

There’s another method of buying gold (and silver), which, quite legally, avoids this cost altogether. There is a slightly higher premium to spot when you buy, there are slightly higher storage costs, and there is a slight discount to spot when you sell – but we are talking about a few per cent here, nothing like 20%.

Given the potential savings involved, it’s surprising that more UK investors don’t buy their gold and silver in this way. The method I’m describing, if you haven’t already figured it out, is to buy sovereigns and Britannias.

How to avoid paying capital gains tax on your gold profits

The gold sovereign usedto be the pound coin. Imagine that – a pound coin made of solid gold. It was the pound coin from 1816, after the Great Recoinage, until 1932, when the UK finally abandoned its gold standard. Until then, the pound really was “as good as gold”. 22 carat gold to be precise – that’s about 92% purity.

A goldsovereign weighs about 7g, which is about a quarter of an ounce. Such is the devaluation of money that has taken place over the last three generations, it now takes about 250 pound coins to buy an old pound coin.

Despite the UK no longer being on the gold standard, the Royal Mint began producing sovereigns again in 1957 and continues to the present day. Many of them are minted in that well-known British heartland, Delhi (there is a huge market for them in India).

Technically these coins are legal tender, so they are exempt from CGT.

Aren’t sovereigns collectors’ items, and so more expensive than ordinary gold? Some are. For example the sovereigns struck in 1937 for Edward VIII were never circulated, because he abdicated. Thus the 1937 sovereign has considerable numismatic value. One sold in 2014 for over half a million pounds. That’s some premium.

Usually though, because sovereigns are so common, the numismatic value is zero. You can pick up 100-plus-year-old Victorian coins at a few per cent over spot. You get the history for nothing.

Gold Britannias – which are an ounce in weight – have only been issued since 1987. But they, too, are considered coins of the realm. Despite the fact that an ounce of gold is close to £1,000, the face value of a Britannia is £100. Don’t ask me how that works. I’m sure there’s a reason. But, as coins of the realm, they are exempt from CGT.

The Royal Mint began producing silver Britannias in 1997. They too weigh an ounce. They have a face value of £2 (an ounce of silver is about £14). They too are exempt from CGT.

For the quantities you would need to be buying to be liable for 20% CGT, you’re likely to be paying 4%-6% in premium above spot to buy any of these coins. You’ve then got to store them. That’s as little as a few hundred pounds a year if you go for a safety deposit box, but the simplest solution is to store them with the dealer you bought them from, which makes selling that much quicker when you come to do that. There will be a cost to this.

However, all in all, gold sovereigns and Britannias make for a considerable saving on cost because of the CGT exemption – assuming you have made a gain when you come to sell. And of course, there’s no guarantee of that.

So if you think the premium over the spot price is worth paying in order to avoid shelling out 20% CGT, there are a plethora of sovereign dealers out there. Sharps Pixley on St James Street in London is great. It’s worth the trip to look round their shop. Ross Norman, the boss, is a buddy of mine.

So is Mark O’Byrne, one of the men behind GoldCore. I like Goldcore. You can deal with them either over the phone or open an account online. You can buy sovereigns, Britannias, bars and probably even bells, and they’ll take care of the storage too.

  • Paul Atkinson

    Dominic as always we are delighted that Moneyweek lead the charge in the promotion of physical purchasing of gold. That is one of the reasons we have advertised so often with you. What a shame it is that you have decided only to mention a “Buddy” of yours in the article which goes out to Moneyweek subscribers and is available on the Moneyweek website without mentioning other bullion dealers who like ourselves advertise with you . We offer just as competitive service and pricing. Fair’s fair old chap! Love to hear what Merryn thinks. Paul Atkinson Atkinsons Bullion& Coins

    • D Frisby

      Paul, I have never used your service, so I can’t personally recommend it. Other writers who have might be able to. Also, frustrating though it may be, your advertising in the main magazine cannot be a reason for me to recommend your company. I hope that makes sense. Dominic

      • ron rivers

        Dear Dominic,
        If you want to invest in gold and expect a profit well within the CGT £11,100 allowance, where best to buy? I’m familiar with ‘Bullionbypost’
        and, although their service is first class, they charge near enough 4% on purchases and then the same on sales. Great actually seeing the yellow metal before consigning it to the keep – here again there is a storage charge of approx 0.8% pa. (plus VAT). As you say, everyone likes to feel the gold is physically theirs, but to go to these lengths means, there has to be mistrust of the system. Indeed, there are respected experts who consider gold insurance so important to a diversified portfolio, that anything other than possession of the asset would be inadequate. So, depressingly, profit needs to be at least 10% just to cover costs. However, a ‘real gold’ transaction unquestionably ‘outweighs’ a promissory paper one, doesn’t it? In conclusion and as usual, the ”Middleman” has it, and the risk is all mine!!

  • Phil

    One little question: does the exemption of CGT apply to foreigners non UK residents that sell theirs sovereigns or Britannia in GB?

  • DW

    I agree Dominic, I can’t understand why more people don’t invest in physical gold and silver, especially Brittanias and sovereigns. Great coins and CGT free. Make a purchase from Atkinsons, you won’t be disappointed, then you can recommend them. I’m a very happy customer.

    • Peter Edwards

      you will if you get burgled

  • Christopher Pett

    I think that it is worth mentioning also, that Gold Sovereigns and Britannias are exempt from VAT when you purchase, Silver Britannia’s are not.

  • FRED

    “Technically these coins are legal tender, so they are exempt from CGT.”

    The same for Kruggerand. See also for good physical gold provider in Switzerland and Belgium

  • jaizan

    Which reliable gold retailers allow me to show up and purchase Sovereigns with cash ?

    After all, considering countries like the US have banned holding gold in the past, part of the “insurance” should be ensuring no one knows I have the gold.

  • Jonathan Tedd

    Having suffered 4 years of losses on my sovs, I sold them and put the lot into Fundsmith ISA and a some in to my SIPP. Immediate returns – thanks Terry.

    Insurance? Probably best to hold cash. That’s what Bill Bonner said.

    • bobbo christin

      my krugs have trebled since “broon” the loon sold our gold out,i am delighted and happy to hold THE REAL THING in relative security.

  • 4-caster

    Keep your gold in a safe deposit box that’s independent of any bank. In a financial crisis the banks will be closed.

  • beckjeremy .

    Don’t forget GoldMoney –
    No VAT on silver there either.

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