Tax efficient investments – the sometimes overlooked legacy of Margaret Thatcher

8th April 2013


For investors, the longest lasting legacy of Margaret Thatcher is arguably the creation of the personal equity plan introduced by her Chancellor Nigel Lawson in 1987.

The Pep was created as part of the Thatcher credo of popular capitalism, and among other things was a tax efficient home in which to hold the shares of newly privatised companies, as the Thatcher revolution accelerated.

Peps could, of course, be used to house a single company investment but what they really succeeded in doing was introducing people to the habit of making a substantial annual investment in funds, whether unit trusts or investment trusts.

Investors who have made sure they regularly took up all or at least most of their Pep allowance each year, are likely to be very well off indeed, these days.  If more people had got into the habit of doing so, we would be a lot better of as a country.

The Tessa, a bank account version, was introduced by John Major in his brief stint as Chancellor just before Lady Thatcher’s fall from power.

The Pep and Tessa was replaced by the Isa regime by New Labour in 1999. The stocks and shares version became less generous with the abolition of dividend tax credit regime, especially hurting non-taxpayers, but the basic principle of a tax wrapper allowing savers and investors to shelter a certain amount each year was preserved.

It is no surprise that the Isa allowance has increasingly been more generous now that we have a Conservative led coalition in power as it represented one not insignificant detail of Thatcherism.

It is one legacy that will not provoke too much debate, except among the more ardent left wingers who would like to see a great deal more state ownership of the economy.

Of course, it was during the Thatcher years, that the City of London lost many of the final vestiges of the old boy network, though some would argue for all their downside, they kept the lid on some of the less appealing aspects of stock market and indeed financial market exuberance.

Financial adviser Brian Dennehy of give this unflinching assessment describing a slightly more roller coaster ride than is sometimes recalled. He writes: “The 1980s was a time of recovery, for markets in particular and capitalism generally. In contrast, the 1970s for the UK had been a time of huge turbulence, politically, economically, socially, and there were painful adjustments for many older industries and the communities which relied on them (which continued some way into the 1980s).

“By the 1980s, the stock market was prepared to look beyond the continuing political turbulence, and social pain, and rose very sharply from 1982, celebrating a new era led by Ronald Reagan and Margaret Thatcher (elected Prime Minister in 1979). The big idea was that Governments were to shrink and capitalism was to be allowed to flourish. Individualism and greed were good.

“We mustn’t forget Sid. Shrinking the Government and popular capitalism combined to create an era of privatisations, selling off publicly-owned assets. In 1984, amidst massive publicity, British Telecom was sold off. Two-fifths went to the general public, mostly novice investors, and on 20th November 1984 there were 2.1 million new budding capitalists enjoying an investment which doubled in value on the first day.

“Returning to Sid, by 1986 it was the turn of British Gas to be privatised, the most ambitious to date. To encourage participation the slogan was invented: “If you see Sid, tell him”. Four million applied for shares, 1.5m received an allocation, and many sold within the first few days for another handsome profit.

“A new generation of individual investors enjoyed regular windfalls, and, importantly, they were also increasingly confident as consumers. The growing confidence also spread through the board rooms of the UK. There were plenty of predators from Hanson to Polly Peck. Animal spirits abounded, a necessary ingredient for any budding mania worthy of the name.

“After a Spring 1987 election, Margaret Thatcher was comfortably re-elected, following another “Budget for equities”.  The stage was set for the stock market Crash.  The Thatcher and Lawson double act then also set up the property bubble and Crash, straddling the end of the decade. (She left office in November 1990)

“By the time she left power capitalism might have been revived, but there were plenty of scars too.”

30 thoughts on “Tax efficient investments – the sometimes overlooked legacy of Margaret Thatcher”

  1. Anonymous says:

    Great blog Shaun. All your criticisms of Martin Wolf are spot on target.
    However, I think his prediction of low interest rates for the foreseeable future is probably accurate, given the political power of those who benefit from them.

    1. Anonymous says:

      Hi Ian

      I agree that there is enormous pressure from our political class and the 0.01% for interest-rates to remain very low. That is one of the reasons why I wrote this piece as it is rare for someone to point out that there is another way.

    2. Anonymous says:

      The UK will only raise rates when forced by externalities such as a US recovery. US had a house price crash clearout, the UK hasn’t and will implode when rates rise.

  2. Dave Holden says:

    Excellent post.

    1. Anonymous says:

      Thank you Dave.

  3. Drf says:

    Real Capitalism cannot exist without savings, since there would be no capital for individuals to own to invest, except via so-called “Private
    Equity” which is in reality Asset Stripping in a new disguised
    form based mainly on borrowing. No one can start a new business without saving capital first, unless they borrow all the capital they need, and that involves great risk of failure in becoming immediately an excessively highly-geared enterprise.

    Even Keynes acknowledged that: “…the best way to destroy the Capitalist System is to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches
    strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become “profiteers,”, who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.” We can see exactly that in our economy now.

    Wolf has continuously demonstrated his falacious left-wing concept of phony economics in all his latter writing. The man’s brain seems to have become derailed so that he can no longer recognise reality.

    1. Mike from Enfield says:

      Your last sentence in particular is absolutely spot on!

    2. Anonymous says:

      Wolf has no interest in “real” capitalism. He and his fellow journalists, academics, and other phone sanitizers hate real capitalism and are sure that if they ran things, from top to bottom, it would work out much better. This is in spite of there being no evidence that any of them can spot or run an investment or business with a positive return on resources expended in the investment. There can be no evidence as all of this sort have carefully ensconced themselves in careers where there are no repercussions for being wrong and they are never actually measured on success and effective management or investment.

  4. Laughing Gnome says:

    I know there is a campaign to remove “unfair tax advantages” from mortgage-to-let landlords, but how would one legally legitimate business be distinguished from another?

    No, I would leave them their tax relief but utterly destroy their business with a program of council house building financed by debt free sovereign money.

    1. Anonymous says:

      Hi the Laughing Gnome (nice David Bowie reference) and welcome to my corner of the blogosphere.

      As to your question I do not have an answer which is why I have not fully proposed it so far. I have one in return which is how do you define “debt free sovereign money”?

      1. Laughing Gnome says:

        Thank You Shaun.

        I am a supporter of the Positive Money campaign. I believe in preventing private banks from expanding broad money by extension of credit. Should any expansion of the money supply be required it would be credited debt-free by an independent monetary committee to the credit of the state, to be used by the government according to their electoral mandate.

        The power to create money should be exclusively a sovereign power. In the current deflationary climate and notwithstanding he current fractional reserve banking system, debt free sovereign money spent into the economy would have a far more beneficial effect than the massive QE effort.

  5. Anonymous says:

    Martin Wolf is right for the wrong reasons. Interest rates will remain low and more money printed as to do otherwise will crash the economy. Those with access to cheap debt will load up with assets and live off the rent thus the rentier class benefit! In the end it all leads to inflation which is really what men like Martin Wolf want.

    1. Forbin says:

      yes seem to have got it !

      but remember these people require the Banks to survive. The TPTB are entwined with them.

      Thus saving the economy means saving the Big Banks.

      inflation in monetary terms is nothing much if you own the assets that bring cash in – what ever that value is . Hyperinflation , meaning very short term inflation , like Germany, would hurt , and will be avoided but long term ( anything of a few percent to 10 % over a year) will be fine.

      Current economics is not working and this is because theres a “battle” going on, we have not yet reached the “war” stage.


      PS: As with all “wars” we are powerless to prevent them – I suggest a nice comfy sofa and some popcorn …..

    2. Anonymous says:

      I’m not so sure. I think the inflationary event was 1997 to 2008 – wages fell by 50% or so relative to house prices.

      Now is the attempt to backfill as the debts are called in. If they didn’t backfill we’d have deflation and prices would be restored relative to wages. They are trying to inflate but demographics and shifting attitudes to debt are making this very tough. This is why they continually push 2007 as the benchmark, seeking to make it “normal” when in fact that was the height of lunacy.

      I think we will see deflation as the boomers stop borrowing (and start dying) and the young, having spent a few years off the consumer treadmill, refuse to play ball.

  6. dutch says:

    A question Shaun.

    ZIRP money…from a previous thread you providied a link that shows roughly £5bn a month is handed out at 0.5%.Who gets it,and what collateral will they have to post?
    Apologies for my ignorance.Here to learn.

  7. dutch says:

    As for Martin Wolf,
    ‘What is needed instead are genuinely risk-taking investors.’

    What does he mean by that?He doesn’t differentiate between entrepreneurial risk and speculative risk.Spunking money on Next shares isn’t the same as setting up a shoe factory.

    1. Anonymous says:

      Hi Dutch

      I suspect that Martin Wolf felt that he had come up with a grand phrase that everyone would agree with! Matters such as please define your terms seem to have been forgotten. In fact the article he wrote is in my view a demonstration of a lack of knowledge about risk!

      As to your question can you remind me of the context?

      1. dutch says:

        The context was in a discussion about how much gets lent at the base rate at 0.5%

  8. Anonymous says:

    One of your best columns, ever Shaun.

    Governor Poloz of the Bank of Canada would never call for
    wiping out the rentier class, but his remarks at Saskatoon, Saskatchewan on April 24 bear some resemblance to what Mr. Wolf was saying:

    Mark Carney spent most of the latter part of his tenure at
    the BoC from September 2010 forward warning Canadians that big interest rate hikes were coming and they were going to be brutal. It never happened. Nonetheless, it was a bit of a sea change for Governor Poloz to say that lower interest rates might be here to stay.

    Oddly enough, one of the ways one might think a central bank
    might seek to bring keep nominal interest rates low, in the long term, by
    reducing the target rate of inflation, does not seem to have occurred to
    Governor Poloz at all. He was asked specifically in the question and answer session that followed his speech about how inflation measurement had changed since the 1970s. Rather than saying that the upper level substitution bias in inflation measurement had declined substantially since that time, and it might be opportune to consider a reduction in the target inflation rate, Governor Poloz contented himself with some banalities about how now the consumer basket contained Internet services and so forth.

    In a sense, the Bank of Canada seems to be in much the same
    situation as the Bank of England right now. There is a Conservative Government in power with a fiscal policy that is on the restrictive side of normal. It has appointed an outsider as Governor (Governor Poloz previously worked for the Bank of Canada but was head of the Export Development Corporation when he was chosen for the governor’ s job), and seems to hope that he will continue with the existing stimulative monetary policy, at least until after elections in 2015. Finance Minister Flaherty might well have reasoned that the boss of the EDC would be the just the person to keep interest rates low and the loonie down. So far it certainly seems that if anything Governor Poloz is talking the loonie down, not up, in sharp contrast from his predecessor.

    Andrew Baldwin

    1. Anonymous says:

      Hi Andrew

      Thank you for the update on the state of play in Canada which does have more than a few familiar parts to it. As to your suggestion of “reducing the target rate of inflation,” it will have the world’s political and much of its economic class spluttering into their tea or coffee as their intention is exactly the reverse! It was not so long ago papers were being written suggesting that an inflation rate of 4% should be targeted.

      1. digger says:

        It worked out well in the Ukraine.

    2. Anonymous says:

      One thing Flaherty didn’t predict was his heart attack. He created the 40 year mortgage but then wound it back down later in his tenure (apparently having seen the error of his ways).

      Carney is talking rates up because he wants the cheap money that comes with low rates but not the speculation / asset bubbles. Prices continued to rise in Canada so it didn’t work there either. Most people have no idea who Carney is never mind that he’s talking rates up. Totally ineffective.

      1. dutch says:

        ‘One thing Flaherty didn’t predict was his heart attack. He created the
        40 year mortgage but then wound it back down later in his tenure’

        Is it wrong to find that funny in an ironic way?

        1. Anonymous says:

          Take it as you find it. I only learned of Canadian house ramping retrospectively so haven’t built up the same ire as for Merv.

          Rates on hold shocker today. Lots of elderly finance fat cats would have a heart attack if they raise them.

  9. Noo 2 Economics says:

    “What is needed instead are genuinely risk-taking investors” – this is very similar to what Brown was saying to the banks in the early 2000’s as he extolled them to take on more risk and we know where that led……

  10. Eric says:

    Brilliant Shaun, so many quotable lines!

    For sure we need savers and borrowers, but it only works if the reward for lending and the cost of borrowing have a realistic prices – which, clearly under ZIRP, they don’t. Worse still, the road back from this madness looks just as tricky as the road in.

    And – as a “risk-taking saver” so far I’m slightly worse off than if I’d left the cash in the Bank. There’s a huge difference between low returns on deposits and losses on investments!

  11. Paul C says:

    Hi Shaun, I noticed MW’s article early evening yesterday and thought this is going to be incendiary. I agree with your above analysis of his points but you have to admire his turn of phrase to enrage folk and create a talking point. I posted under the name of “SHA” early in his feedback and got quite a few recognition’s by the regulars in the Comments section of the FT.

    MW’s short piece did make people think a little harder.I think highlighting that savers are being raped is worth doing , also that asset owners are making vast gains at everyone else’s expense is also worth emphasizing. His concluding piece about it going on for 20 years is quite likely just plain wrong, (with his track record) but again it is a kind of challenge that makes people think about the the subject properly.

    I couldn’t keep up with the replies on the FT such was the wildfire of feedback, glad to see you noticed it too.


    1. Anonymous says:

      I liked your post IIRC. I agree keeping the plates spinning for 20 years would be Merv/Carney’s wet dream. A crap 20 years like Japan is the absolute best possible outcome for the UK. It will likely be a lot worse and come a lot sooner.

  12. John Bruce says:

    You put your finger on the reality that ZIRP has absolutely nothing to do with the ordinary person or SME which works in s different world with overdrafts between 15 – 20%, with many credit cards above and loans less than 10% but no where near the cost of borrowing printed cash.

    The Rentiers are in fact the banks – living well on high returns from dead investment – and we would be much better off if we simply let them go. Inevitably the current system is ‘dead men walking’ in an unreformed industry which may have been ‘too big to fai’ before we knew the cost to every family in Society, but next time will be found to be far ‘too big to save’. What will kill them is what killed Lloyds of London. Chasing a diminishing derivatives tail round and round until there is nothing left – but the problem is that to keep this ponzi going requires ever new derivatives to be creatively produced. It is not just madness but predicates tears before bedtime which will make the Weimar Republic problem look like small beans.

    But the really worrying thing is the total misunderstanding of what constitutes growth. Every increase in activity is hailed as ‘recovery’ and ‘growth’ when – in fact – whilst government spending on Infrastructure and housing et al certainly increases consumerism which can be a healthy sign of growth, none of it is Growth. The only way any economy can grow is by earning more from abroad than it spends abroad. Our exports now stand at 27% of GDP – last month or so, whilst we enjoyed a trade deficit of £10bn Germany was in the black by a similar sum. We are, therefore borrowing £320,000,000 a day to survive but we have absolutely no policy to create new revenue streams from abroad, which requires Innovation (as properly defined). Kindle or SATNAV type innovation creates new markets, new overseas revenues, new jobs and new manufacturing.

    We in the UK have no commercialised a single Innovation – not one Innovation in 45 years. Dyson was self funded. Why? We don’t fund it. So we are in a decline measured by our fall from 50% of GDP in manufacturing to current 9% of which we own less than 2%.

    John Bruce

  13. Anonymous says:

    Hi forbin

    Yes well remembered and for those who were unaware of this or had forgotten let me take you back to the 28th of September 2010 and the words of Bank of England Deputy Governor Charlie Bean.

    “Savers shouldn’t necessarily expect to be able to live just off their income in times when interest rates are low. It may make sense for them to eat into their capital a bit.”

    “Indeed when asked this question.

    This bad news for savers is the point of what you are doing?

    He replied “yes”.”

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