An obscure inheritance tax law is allowing the Revenue to punish those who donated to the Vote Leave campaign, in a similar fashion to the 2013 IRS controversy, writes Jonathan Neumann
Recently, the UK came dangerously close to an entire news cycle that didn’t mention Brexit. For a brief moment, it felt as if there was no new ground to go over, that all paths had been trodden and every tree barked up. What more, after all, could there be to say? Little did we know, but we were not out of the woods yet, because somewhere between Whitehall and Fleet Street, a new story was coming into bloom.
Apparently, HM Revenue and Customs (HMRC) has issued tax bills to a number of prominent donors in the Brexit referendum campaign in connection with their contributions to organisations on the Leave side, in an assessment assault dubbed by newspapers as 'the revenge of the Establishment'.
This alleged 'political attack' by HMRC has echoes of the 2013 IRS targeting controversy in the United States. In that episode, the Inland Revenue Service was investigated by the FBI over claims that conservative and libertarian groups within the 'tea party' political movement were unfairly or excessively scrutinized by the tax authorities in relation to their left-wing peers. No criminal charges were brought, but the parties apparently reached a financial settlement, while investigators reportedly described the IRS as a mismanaged bureaucracy that was enforcing rules it did not fully understand.
The controversy on this side of the pond is over what the papers have described as an 'obscure' inheritance tax law. What they’re referring to is the tax on lifetime chargeable transfers. Obscure or not, this tax, at 20 per cent of the value transferred, is certainly significant.
As readers will know, a gift from one UK-domiciled individual to another is, certain exceptions notwithstanding, a potentially exempt transfer (or PET). This means that any value of the gift above £325,000 is taxable (at 40 per cent) only if the donor dies within 7 years. But for every year the donor lives after making the gift, the potential rate of tax falls. If the donor survives seven years, there is no tax to pay.
When, however, individual makes a gift to a recipient who is not another individual (for example, a trust or a company), the gift is a lifetime chargeable transfer and there is an immediate tax liability of 20 per cent on any value of the gift above £325,000 (and if the donor then dies within seven years, the rate could rise to 40 per cent.)
Gifts to charity and donations to political parties – as long as the latter receive at least 150,000 votes and have one MP – are exempt from this charge. But pressure groups and campaign organisations, such as those in the Brexit referendum, are not.
Hence HMRC is after significant donors for not reporting their gifts and for forgetting to pay the tax.
Why, though, are we only hearing about donations to the Leave side? An alternative to the 'revenge of the Establishment' argument that has been advanced is that whereas substantial contributions to Leave were made by individuals, those to the Remain campaign were made by corporations, which, provided they are 'widely held' (meaning they have more than five shareholders or participators), cannot make 'chargeable transfers' and are therefore outside the charging regime. This may solve the tax issue, but doubtless raises its own political questions.
Politics aside, the lesson for individuals remains the same: consider carefully the implications of making gifts and don’t leave reporting and paying your tax for too long.
Jonathan Neumann works are boutique private wealth law firm Maurice Turnor Gardner LLP