Contractors with surplus profits in their limited company can use this cash to generate its own income, and there are times when gold can act as a safe haven, or offer a better return than other investments.
Typically, contractors have placed money on deposit in high interest bearing accounts, or invested in shares or property. But the returns on many of these ‘traditional’ investment options is increasingly low or volatile.
Investing company money in gold can offer contractors with the right risk profile an alternative to ‘traditional’ options and could provide significant returns which, although not guaranteed, could certainly be greater than those offered by the interest on cash deposits.
Gold as an alternative investment
Interest rates on most deposits are so low [at the time of writing] that, with higher or rising inflation, cash is actually falling in value - it's buying power being eroded by negative real terms interest rates. Instability in the global financial markets is worsening, with the value of shares, and all the associated financial instruments and products that depend on them, falling.
Other investments open to contractors previously considered to be safe havens, such as government bonds, are becoming riskier as countries threaten to default on their debts and have their credit ratings downgraded. Those that are still relatively ‘safe’ have low interest rates.
With the UK’s housing markets depressed and no sign of a recovery any time soon, even property is losing its shine as a company investment option.
So, as things stand, many investment options offer no or low rates of return. Gold, however, has been steadily growing in value, in part because it is perceived as an alternative that might offer an acceptable rate of return, and combat the issue of a negative return on cash in real terms.
Investment options for gold
Contractors have several choices when investing in gold. They can buy and own physical gold. This can be done by purchasing gold sovereigns, such UK issued sovereigns and the Britannia, or the South African Krugerrand. Contractors can also buy gold bullion. Small amounts of gold can be kept in a home/office safe, but it is safer to pay for secure storage in a vault. These storage costs should be factored into any investment projections.
Contractors can also choose to buy shares in a gold fund, rather than physically owning gold. A ‘gold exchange-traded fund’ (ETF) is a fund that trades on the global financial markets and tracks the price of gold. These investments are sometimes called ‘paper gold’.
Alternatively, contractors can invest in gold mining companies, as there is generally a correlation between the price of gold and the share price of gold-mining companies.
How to invest in gold
Gold bullion can be bought over the internet. There are many reputable online coin dealers who will sell a contractor’s company gold coins and bars and deliver them to the door. Alternatively, contractors can choose to buy the gold and ask the seller to store it for them, usually in exchange for certificates.
Gold exchange-traded funds and shares in mining companies can be bought and sold by phone or online via a broker, just like buying and selling regular equity shares. There are also funds based on ‘baskets of gold miners’ shares.
Gold has been steadily growing in value
Contractors planning to make gold investments using company money should ensure that any transactions are in the name of their limited company, and not in their own name.
Tax implications for a limited company buying gold
When assets, such as gold or shares, owned by a business increase in value and the company makes a profit from their sale, capital gains tax is applied to that profit. In practice, at the end of the financial year, the business must treat the capital gain as a company profit and charge corporation tax [21% at the time of writing] on it. However, because the UK-issued gold sovereign and Britannia are actually legal tender, there is no capital gains tax charge if they are sold at a profit.
If the company owns an asset that has appreciated in value, such as an equity investment or precious metal, but the asset is not sold during the financial year, the company’s accounts will reflect that increase in value, but there is no corporation tax charge until the company sells the asset and the profit is realised. Company capital gain tax is a complex area and contractors should consult their accountant.
Contractors should also be aware that if the income from their gold and other investments exceeds their trading income from contract fees, their limited company becomes a ‘close investment company’ and attracts a higher rate of corporation tax.
Financial health warning
Contractors should understand that, as with any investment, there are risks associated with buying gold. Gold is a commodity and is not regulated by the Financial Services Authority. The value of gold can go down as well as up. Being a commodity traded in international financial markets, the price of gold can fluctuate sharply.
Shares in gold funds and miners can also fluctuate and are also influenced by wider financial market sentiment. Some mining companies are highly speculative ventures that may never turn a profit, potentially leaving investors with nothing.
Despite the warning, contractors with the right risk profile, and who take expert financial advice, may find that gold offers a profitable investment option for surplus cash in their company.
Published: Tuesday, August 23, 2011
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