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A Tale of Mischief: "Bad Boy of Brexit" lands unexpected IHT Liability20th May 2020 Wills, Trusts & Estate Planning
Arron Banks, the Brexit-supporting businessman who styled himself a “Bad Boy of Brexit” in his 2016 book chronicling the “Tales of Mischief” in the EU Referendum Campaign, has recently failed in an attempt to have a £162,000 inheritance tax bill set aside. Somewhat ironically, Banks relied upon both the European Convention of Human Rights and the UK’s obligations pursuant to the Treaty on European Law, but was unsuccessful in the Upper Tribunal in April.
The facts of the case (and indeed the applicable domestic law) were not in dispute. Between October 2014 and March 2015, Mr Banks made (presumably without taking professional inheritance tax advice) donations to the UK Independence Party (UKIP) and its affiliated youth organisation totalling almost £1m.
In the 2010 General Election (i.e. the general election preceding the donations), UKIP did not have any MP elected – although it secured 919,471 votes, more than the Scottish National Party and the Green Party who had MPs elected under the “first past the post” system. UKIP was recognised as having “major party status” for the 2015 election by Ofcom in March 2014, and in October 2014, UKIP gained its first MP in a by-election (Douglas Carswell, Clacton). A second MP (Mark Reckless, Rochester and Strood) was elected in a further by-election in November 2014. UKIP went on to have one MP elected in the 2015 general election, securing 3,881,099 votes.
The UK’s inheritance tax legislation can be complex, and it is not surprising that Mr Banks overlooked the potential for a tax liability when making these donations. Inheritance tax is often thought of as a tax arising on death, and even those who understand the potential for a charge arising in lifetime often associate this with a gift into trust, or other complex tax planning mechanisms. A gift of cash in the circumstances described above is not an immediately obvious event giving rise to a charge.
However, the legislation seeks to tax all “transfers of value”, except to the extent that those transfers are exempt. Section 24 of the Inheritance Tax Act 1984 provides an exemption for gifts to political parties, but only parties where, at the last general election, two MPs from that party were elected, or one MP was elected and the party received not less than 150,000 votes. Neither of these definitions applied to UKIP (as UKIP’s MPs were elected in by-elections), and Mr Banks became liable due to the specific wording introduced by a private Member’s amendment to the Finance Act of 1975 which introduced Capital Transfer Tax (a predecessor to inheritance tax).
First Tier Tribunal
Mr Banks accepted the implications of section 24, but argued that the application of the rule involved:
a. Discrimination pursuant to Article 14 of the Convention together with Article 1 of the First Protocol (protection of property);
b. Discrimination contrary to Article 10 (freedom of expression) or Article 11 (freedom of assembly);
c. A breach of Mr Banks’ rights under Articles 10 and 11;
d. A breach of UKIP’s rights under the Convention; and/or
e. A breach of the UK’s obligations under Article 4 of the Treaty of the European Union.
The First Tier Tribunal decided that:
a. The difference in treatment between Mr Banks and an individual who had donated to a “political party” qualifying for exemption under section 24 amounted to discrimination on the grounds of political opinion.
b. That difference in treatment was in pursuit of a legitimate aim (i.e. preventing abuse of the relief by restricting donations to political parties playing a meaningful role in political debate).
c. Nevertheless, the means of addressing this aim was not proportionate as it did not strike a fair balance (in the context of the first past the post system).
d. Accordingly, the differential treatment could not be objectively justified.
e. Section 24 could not be interpreted under the Human Rights Act in a way that was compliant with Mr Banks’ Convention Rights.
f. Article 4 of the Treaty of the European Union did not give any directly enforceable rights.
In essence, therefore, Mr Banks was unsuccessful on the basis of issues e. and f. Mr Banks appealed on those issues, whereas HMRC appealed on the issues at a. and c. above.
The Upper Tribunal agreed with HMRC on all points and dismissed Mr Banks’ appeal. The Tribunal held that there was no discrimination (either direct or indirect) and that the measures in section 24 pursued a “rational and legitimate aim” and were therefore justifiable. Dismissing the suggestion that the legislation breached Mr Banks’ rights to freedom of expression and assembly, Mrs Justice Falk ruled that “the existence of a tax charge does not obviously restrict the expression of any opinion or the ability to associate, whether with UKIP or anyone else”.
Whilst this is an interesting case (and one which might divide political opinion), there are not likely to be many similar political donations which trigger a charge to tax.
Nevertheless, the case underlines the importance of professional legal and tax advice as part of any proposed transfer or donations to any organisation (whether political or otherwise), and as part of a wider estate and succession planning strategy. We would encourage all clients to carefully consider the tax implications of any actions which reduce the value of their estate, and to also consider the wider liability to inheritance tax which will arise on death.