Brexit: Donations to the Leave campaign. Taxable or not?

This week the Daily Telegraph reported that HMRC have issued tax demands to donors who made significant contributions to the Leave campaigns. Among those reported to have received letters from HMRC are Lord Edmiston (who donated £1m), Arron Banks, the insurance entrepreneur and Peter Cruddas, a City banker. This move by HMRC is described in the Telegraph as a ‘political revenge attack’ by the Establishment on significant donors to the Leave campaign, citing a ‘relatively obscure area of inheritance tax laws which forces people to pay the tax upfront on large “gifts”’. The Telegraph has quoted the aforementioned Brexit supporting donors as stating that HMRC had been acting in an “anti-democratic manner’. Jacob Rees-Mogg, a Brexit supporting Conservative back bencher, echos these sentiments by saying the tax demands were “fundamentally hostile to democracy” and that the Government was “penalising people who had the audacity to challenge it”.

As a tax practitioner my opinion is that HMRC was correct in issuing these letters, that this is not an affront to democracy, if anything quite the opposite, and is an example of exactly what the Leave campaign ultimately wanted (i.e the implementation of British laws passed by the sovereign Parliament).

I start with the law. The relevant provisions are contained in the Inheritance Tax Act 1984 (‘IHTA’). S1 IHTA states, quite simply”

“Capital transfer tax[1] shall be charged on the value transferred by a chargeable transfer.”

S2 IHTA goes on to explain:

“A chargeable transfer is a transfer of value which is made by an individual but is not exempt by virtue of Part II of this Act or any other enactment)”.

S 3 IHTA states, in summary, that a transfer of value arises where as a result of a disposition made by the individual, the value of his or her estate is reduced by the amount transferred.

Unless the transfer is exempt under Part II or is ‘potentially exempt’ under s3A IHTA, then the transfer is a ‘lifetime chargeable transfer’, immediately chargeable to IHT at 20%. This will be the case if the transferor has previously used all of his available nil rate band (currently £325,000) or, indeed, if the gift itself exceeds the nil rate band, in which case the element that exceeds the nil rate band will be subject to the immediate IHT charge.

Could the transfer to the Leave campaign be a potentially exempt transfer[2] (‘PET’)? No. PETs only occur where the transfer is to an ‘individual’. S3A IHTA states:

“(1) Any reference in this Act to a potentially exempt transfer is a reference to a transfer of value….

(c) to the extent that it constitutes…. a gift to another individual…”

The donations in question were patently not gifts to ‘another individual’ and consequently cannot therefore be considered ‘PETs’. The starting point must, therefore, be that the donations are immediately chargeable transfers, unless the transfer is exempt under Part II IHTA.

Part II lists exemptions that many of us will be familiar with, such as transfers to spouses or civil partners (s18), the annual £3,000 general exemption (s19), the normal expenditure out of income exemption (s21) (perhaps not so widely known), gifts on marriage (s22), gifts to charities (s23) and of particular note, gifts to political parties (s24).

S24 states as follows:

“24 Gifts to political parties

(1) Transfers of value are exempt to the extent that the values transferred by them—

(a) are attributable to property which becomes the property of a political party qualifying for exemption under this section, …1

(b) …1

(2) A political party qualifies for exemption under this section if, at the last general election preceding the transfer of value,—

(a) two members of that party were elected to the House of Commons, or

(b) one member of that party was elected to the House of Commons and not less than 150,000 votes were given to candidates who were members of that party.

(3) Subsections (2) to (5) of section 23 above shall apply in relation to subsection (1) above as they apply in relation to section 23(1).

(4) For the purposes of section 23(2) to (5) as they apply by virtue of subsection (3) above property is given to any person or body if it becomes the property of or is held on trust for that person or body, and “donor” shall be construed accordingly”.

There is no definition of ‘political party’ in IHTA 1984 (nor for that matter does there appear to be in the wider taxes acts, although your author confesses to having only had a relatively quick scan). A dictionary definition (Collins) provides:

“An organisation of people who share the same views about the way power should be used in a country or society (through government, policy making, etc)”

Perhaps, then, in broad terms the various Leave and Remain campaigns may have fallen under the general definition of ‘political party’. However, I am not convinced that even they would have described themselves as such. There were clearly MPs on both sides campaigning for their respective positions. Could a donation to either Leave or Remain be exempt from IHT under s24? No. Even if we could accept Leave and Remain as being political parties (which is a stretch at best), the MPs who were in either camp were not sitting in Parliament as members of the ‘Leave’ or ‘Remain’ party. They are MPs representing the Conservatives, Labour, Liberal Democrats etc. Consequently, neither Leave or Remain, as ‘political parties’ have MPs sitting in Parliament.

Under the requirements set out in s24, it does not take a tax lawyer or chartered tax advisor to be able to quickly determine that a donation to either the Leave or the Remain campaign cannot be considered a ‘gift to a political party’. Any such donation does not qualify for the exemption under s24. A quick perusal of the remainder of Part II of IHTA suggests that there are no other relevant exemptions applicable to a donation to either the Leave or Remain campaigns.

Assuming, therefore, that the aforementioned donors to the Leave campaign have exceeded their nil rate bands, then it is only right and just that the appropriate amount of IHT is paid on these donations (the rate being 20% with an additional ‘top up’ should they die within 7 years of having made the gifts). The Telegraph has stated that this is a ‘relatively obscure area of inheritance tax laws’. Any tax practitioner working in the area of trusts or indeed IHT generally will be fully aware of these provisions. They are not in any way obscure.

The upshot of these HMRC tax demands is that, I would argue, the Leave campaigners have got precisely what they wanted and campaigned for. These sections of IHTA 1984 are wholly untouched by the law and institutions of the EU. They are laws that have been passed, scrutinised and debated by a democratically elected sovereign Parliament. This is not a revenge attack by the establishment and is not ‘hostile to democracy’, but simply HMRC applying the law. Any attempt to suggest otherwise is arguably itself an attack on democracy, and is a distasteful attempt for specific individuals to attempt to avoid paying the tax legally owed by them.

[1] I.e. inheritance tax

[2] Such transfers only become taxable in the event that the transferor dies within 7 years of having made the gift (subject to a tapering relief) but are not immediately chargeable to tax