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Before the 1960s, the basic wealth management problem for every high-income Briton was that capital gains weren’t taxable, but income was. If you earned money from selling services, then it’d be taxable income, but if earned money from the sale of capital, then it wouldn’t be taxed at all. 

David Lough No More Champagne: Churchill and His Money (Head of Zeus, 2015) tells the delightful story of Winston Churchill and his lawyers’ long battles to evade tax on his personal income, including one ridiculous attempt to get the receipts from his syndicated newspaper articles characterized as sales of capital rather than as income. 

In 1941, the Chairman of the Inland Revenue advised the Chancellor the Exchequer that Churchill’s lawyers had been “unable to produce any evidence which could lead me to the view that these were not taxable.” There was no reason it should be: the contracts were for a fixed sum and didn’t involve the entire copyright, so the receipts were transparently in the nature of income, not sales of capital. “He wants to argue that each excerpt was a capital transaction in itself: but it seems to me a hopeless contention,” the Commissioner advised his staff. “However we must listen.” 

On May 19, 1942, weeks after the fall of Singapore, Churchill spent the afternoon away from the House of Commons speaking with his newly-hired solicitor about the prospects of an appeal:

I was warned that he would probably give me ten minutes, that I must be very brief and that I must tell him (if such was the case) that he had two or more courses open to him. Thereafter he would instantly make up his mind which course he would pursue… I was ushered into the Cabinet Room… and started off and said my piece which I had carefully prepared. [Churchill] after a short time got up and started walking around the table, talking as he did so, with the result that, when he arrived at each end he was completely out of earshot. … “If I appeal, will it be entirely private; can anyone get to know about it?’ I replied that it would be entirely private before the Commissioners, but if we won, they could appeal further and then the hearing would be in public. … And so it went on. My “ten minutes” was eventually turned into one and a half hours, but when I left I came away with instructions to lodge an appeal. I remember walking down Whitehall and buying an evening paper, the headline of which was “Why wasn’t Churchill in the House Today?” and at least I felt that was a question which I could answer with some conviction!

Churchill won that battle, even though he really shouldn’t have – the appeal was decided by Inland Revenue’s general commissioners, who ruled in Churchill’s favor at the end of September 1942 – but the earnings from those articles were small compared to Churchill’s copyright in his books. Churchill cleared £50,000 – untaxed – from assigning the copyright in his Life of Marlborough to Filippo Del Giudice’s production company, Two Cities, and another £50,000 – untaxed – from assigning the copyright in his History of the English Speaking Peoples to Sir Alexander Korda and MGM.

The great battle would be over Churchill’s memoirs. He postponed writing them for years; he couldn’t figure out how to make them pay. Even after the war, the top rates on personal income would be punitive – 97.5 per cent during the war, 92.5 per cent in the October 1945 budget, and back up to 97.5 per cent in the April 1946 budget – so Churchill needed some way to transform income into capital. 

Soon enough, Churchill’s lawyers figured it out. Winston Churchill would gift his personal papers to a trust administered by his wife, Clementine, and his son, Randolph, whereon the trust would sell the copyright in the papers to the publishers. Then the publishers would hire Churchill to edit the papers – that is, write the memoirs – for a nominal sum. And it worked!

… it was an offer from the Eton-educated American newspaperman Marshall Field III that gave Churchill’s advisers the kernel of the idea which they eventually used to avoid a large measure of tax. While offering Churchill a five-year deal worth $1.25 million for newspaper articles, Field mentioned that his Chicago Sun would also be part of a consortium bidding at least $1 million for the memoirs. He then suggested that, before writing anything, Churchill should gift his personal papers to a trust for his children and grandchildren. The trust could then sell the book rights before employing him for a much lower sum to ‘edit’ the text – only this last link in the chain would attract tax.

‘They certainly disclose an interesting situation in America, if only it were possible for us to take advantage of it,’ Churchill confided to Lord Camrose.

[…]

By mid-February Charles Graham-Dixon had prepared a detailed tax scheme for Churchill’s memoirs. He had discounted the safest option, the so-called ‘tin-box’ scheme that would delay publication until after Churchill’s death, on the assumption that Churchill or his family would need the money during his lifetime. Instead, he advised, Churchill should gift his papers to a family trust before he started writing his memoirs; then the trustees should sell the copyright of the papers, for a lump sum, to a publishing group; finally that group should make its own separate arrangements with Churchill to write the memoirs for a lesser sum.

The effect of divorcing the documents’ ownership from the memoir’s authorship, he contended, would be to leave the publisher’s money in the trustees’ hands as capital, while only Churchill’s fee as an author would attract any tax. He stressed two points: Churchill must gift the documents before writing a word; and the trustees, not Churchill, must settle the publishing contract. The prospects for success, Graham-Dixon thought, were ‘reasonable’.

[…]

Arriving back in Britain in late March, Churchill continued to claim publicly that he had not made a final decision whether to publish his memoirs. Within a week, however, he had asked Bill Deakin to help him write them and his solicitor Anthony Moir to establish the trust for his papers. Moir’s first draft suggested that the trust should include all papers from Churchill’s birth up to the end of the war; that Churchill should appoint the trustees; that they should be able to publish only with his permission; and that, at his death, the trust’s capital should be divided equally among his children. A firm believer in primogeniture, Churchill changed Randolph’s share to a half.

The Chartwell Literary Trust came into being on 31 July 1946 with Clementine, Brendan Bracken and Professor Lindemann (now Lord Cherwell) as its first trustees. Its official objective was to safeguard Churchill’s papers for posterity, without any mention of the tax advantages: to this end, Churchill expressed his wish that the trustees should eventually pass the papers on to Randolph or Randolph’s own son Winston, one of whom he hoped would write his official biography. Churchill was aware that the duke of Marlborough was considering selling Blenheim in the aftermath of war, so he wanted to make sure that the papers would ‘remain intact at Chartwell and it may well be that my son or grandson will ultimately give them to the National Trust, should Chartwell itself be vested in that Body’.

[…]

Meanwhile [in 1948] the Inland Revenue was on the point of deciding whether or not Churchill’s complicated tax scheme to shelter the majority of the income earned by The Second World War was sound. On their decision rested a much greater sum of money than Churchill had lost through the farms. The local tax inspector, a Mr Boarland, had asked to see a copy of Churchill’s contract with The Daily Telegraph and any other ‘relevant’ document, which Anthony Moir took to mean the parallel agreement between the newspaper and Churchill’s Literary Trust. After consulting Churchill Moir decided against volunteering any extra documents, but instead he disclosed to Boarland:

“In July 1946, Mr Churchill created a Settlement of cash, a large number of personal records and memoranda covering his life both public and private during the period of approximately 1906 to 1945, papers formerly belonging to Lord Randolph Churchill and a casket containing letters from the First Duke of Marlborough, which are of considerable value and were given to him by the Queen of the Netherlands at the close of the War. Under this Settlement no benefit, whether pecuniary or otherwise was reserved to Mr Churchill and this document is not in his possession or under his control.”

Churchill had sold his early copyrights after the war while ‘retired’ as an author, Moir added, but since resuming his writing career on 1 September 1946 Churchill had received twelve payments. Most of them, he contended, were ‘capital moneys’ for the Secret Session Speeches. However, Moir ended his carefully worded letter by offering the tax inspector one small morsel: Odhams Press had paid £500 to reproduce sixteen of Churchill’s paintings in a new version of Painting as a Pastime, which he admitted could possibly be construed as a royalty and therefore subject to tax. ‘If the point is pressed Mr Churchill will submit, without prejudice, to an assessment in respect of this sum,’ he offered.

There followed a ‘very friendly’ meeting at the tax inspector’s office, during which Moir insisted that Churchill’s prime motive for setting up the trust had naturally been to safeguard these ‘vitally important documents’. For more than a month the most senior minds at the Inland Revenue, including the chief inspector of claims (Intelligence Section), pored over Moir’s letter and the documents, but they could find no ‘catch’.

Churchill’s solicitor was confident of the final outcome and in February all five members of the Inland Revenue Board signed a piece of paper that allowed Boarland to confirm that ‘no liability to Income tax arises under the present law in respect of the £375,000 payable by The Daily Telegraph to the Trustees – either on Mr Churchill or on the trustees.’

These days, of course, legislation has reduced the tax preference on this transaction – it might even have made it unworkable – but it’s a stirring story. If Winston Churchill was, as A.J.P. Taylor called him, “the savior of his country”, then his lawyers were the men who saved the savior of their country – well, saved him a lot of money, at least.