An interesting recent case (known as Banks vs IRC) shows the need to take tax advice if you are considering making a political donation or are dealing with the estate of a deceased person who has.
In this case the Court of Appeal considered the Inheritance Tax (“IHT”) treatment of large political donations to UKIP in 2014 and 2015 by Arron Banks; a British businessman and the co-founder of the Leave.EU campaign.
IHT is charged on "transfers of value", which can occur during lifetime (for example, a gift from one individual to another) or on death. The charge on lifetime gifts is 20% of the value transferred. However, many lifetime gifts escape IHT completely by either being subject to specific exemptions or by being Potentially Exempt Transfers or (“PETs”).
In this particular case, the donations could not be PETs as they were not transfers to an individual and did not fit into any of the other very specific criteria for being a PET. Banks did not think this was a problem as he assumed that the payments were entirely exempt from tax as political donations.
The inheritance tax legislation gives an exemption for gifts to political parties if either:
(i) two or more members of that party were elected at the last general election; or
(ii) one member of that party was elected and 150,000 or more votes were cast for candidates for that party at the last general election.
UKIP had two sitting MPs at the time of the donations but neither were elected at a general election; they had both won their seats at by-elections. This meant that on the face of it, the exemption did not apply and IHT was due on the payments.
Banks appealed HMRC’s determination but lost at both the First-tier Tribunal and the Upper Tribunal. In front of the Court of Appeal his lawyers accepted that, on paper, the donations in question failed to meet either leg (i) or (ii) of the exemption.
Banks’ lawyers then argued that the restrictions to the exemption constituted a breach of his human rights or alternatively that it breached the human rights of UKIP; either breach arising under the European Convention of Human Rights and Fundamental Freedoms which was incorporated into the UK Human Rights Act 1998.
The Court of Appeal looked carefully at the background to the exemption and the discussions in Parliament when it was introduced. It found that there were grounds to say that the taxpayer had been discriminated against on the basis of political opinion as there was a difference in treatment of him as a supporter of a party which had not won any seats in the 2010 general election.
Unfortunately for Banks, this was not in itself enough to win the case. The Court went on to say that HMRC had discharged the burden of justifying this difference in treatment. The legislation had been in place for many years and was entirely neutral in its operation.
Banks lost his appeal and will now need to pay the 20% lifetime IHT charge unless he is allowed to and does appeal and succeeds of course.
If you are considering making a political donation, or are dealing with the estate of someone who has, you might want to take advice to check there won’t be any unexpected tax arising from those payments. If this matter is of interest to you please do not hesitate to contact us.
