Danby Bloch: Lessons from 30 years in tax planning

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Financial advisers often need to plan for 30-year periods. Indeed, lives divide into roughly 30-year intervals: in the first 30 years, many people find they are either financially dependent or saving very little, then there is usually about 30 years’ worth of saving from their 30s to 60s, followed by about 30 years of retirement to enjoy.

The theme of the 30-year period came to me recently when I had the pleasure of presenting tax expert extraordinaire Tony Wickenden with the Money Marketing award for his outstanding contribution to the industry. It was almost exactly 30 years ago that my company Taxbriefs published Wickenden’s first book, Uses of Life Assurance in Tax Planning. His co-author was another great technical guru: Mick Chapman of Sun Life and Skandia fame. So I fell to wondering how different the tax system looks today compared to 1986 and how much the strategies that worked then would need to have changed.

One of the problems of tax planning is that advisers assume tax laws will remain broadly the same as they are at the time of making their recommendations. Up to a point, that approach is inevitable. The law is seldom directly retro-active. For example, people that have built up pension entitlements above the various recently introduced lifetime limits have generally been permitted to keep their excess funds without a penalty. However, there will be those in their 30s that have built up reasonable amounts in their pensions (say, about £600,000) who might easily find they will be subject to a surcharge on their funds when they reach retirement.

Advisers should be clear with their clients about the need for them to stay flexible in their planning. A plan could come unstuck with a new law or case decision, so it makes sense not to bet on a single strategy.

Wickenden followed a consistent line in his book and in his writings ever since. He advocates straightforward uncontroversial tax planning and has always kept away from what I would characterise as hardcore full-frontal tax avoidance. As ever, Wickenden was ahead of the game. By the mid-1980s, HM Revenue & Customs had started its crusade against the more buccaneering side of the tax avoidance industry with some major wins in the courts, notably the Ramsay case and Furniss v Dawson, as well as some major new anti-avoidance legislation. Its anti-avoidance armoury has been ramped up ever since.

There have been some other big tax changes over the last 30 years that we can learn from too. Some relate to the transition from capital transfer tax to inheritance tax in 1984. One consequence was the reintroduction of so-called “reservation of benefit”. Under CTT, you could effectively give away an asset (say, into a trust) and still have access to it if you needed it.

Wickenden’s book spells out the value of this facility to those who were farsighted enough to set up a plan that took advantage of it. The fact was that it was really conventional planning: the grandfather, as it were, of today’s gift and loan plans, and discount trusts. Those who got in before the law was changed enjoyed a wonderful tax privilege, and might still do so today, as long as their old plans have not been disturbed or churned.

Looking back, some of the planning strategies that were very conventional at the time seem almost incredible now. For example, if you used something called a deed of covenant to pass cash to a non-taxpayer such as a child (though not your own) you could effectively get 30 per cent tax relief on their maintenance or even school fees.

And the idea that spouses were taxed jointly on their income seems almost surreal nowadays – as does the top rate of income tax, which was 60 per cent. In fact, that seemed relatively benign to many people, because the top rate of income tax just seven years earlier had been 83 per cent on earnings and 98 per cent on investment income. An adviser that recommended bonds with simple 5 per cent tax deferred withdrawals could effectively increase a client’s net income by 1000-fold, at least in theory. It seems inconceivable that tax rates could return to those levels. But never say never.

Likewise, while advisers should encourage clients to use their pensions to pass on assets free of IHT and perhaps cascade down the generations, times could change. Pensions were not invented to be IHT-free estate planning devices. Stay flexible, manage expectations and do not put all of a client’s tax-planning eggs in a single basket. Lots more can happen in the next 30 years.

Danby Bloch is chairman at Helm Godfrey