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Key points
- Exemption from inheritance tax claimed for a gift to a political party under IHTA 1984, s 24.
- Section 24 imposes specific conditions on the recipient of the gift.
- The relief was restricted to political parties that play a meaningful role in national political debate.
- There was no indirect discrimination and UKIP supporters were not particularly adversely affected.
- There was no infringement of rights of freedom of expression or of assembly and association.
In April, the Upper Tribunal published its decision in Arron Banks v HMRC [2020] UKUT 0101 (TCC) (see tinyurl.com/y9mxm64u), in which the taxpayer appealed against the decision of the First-tier Tribunal in October 2018. The case concerns whether a gift to the UK Independence Party (UKIP) falls within the exemption for gifts to political parties under IHTA 1984, s 24.
The facts
Mr Banks, the appellant (and a company controlled by him) made donations to UKIP and affiliated youth organisations totalling £976,781.38 in 2014 and 2015. He wished to rely on s 24 whereby ‘transfers of value are exempt to the extent that the values transferred by them are attributable to property which becomes the property of a political party qualifying for exemption under this section’.
On 15 February 2017, HMRC issued a notice of determination against Mr Banks, assessing him to inheritance tax, which resulted in a liability of £162,945.34. This was on the basis that his transfers of value were not exempt because they did not meet the criteria under s 24 and were therefore chargeable lifetime transfers.
First-tier Tribunal decision
It was common ground that the donations by Mr Banks constituted transfers of value within IHTA 1984, s 3 and the transfers by a company controlled by him should be treated as having been made by him under IHTA 1984, s 94.
The only issue was whether the donations qualified for relief under s 24. A political party qualifies for exemption under s 24 if, at the last general election preceding the transfer of value:
- two members of that party were elected to the House of Commons; or
- 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.
At the general election on 6 May 2010, UKIP failed to have any of its candidates elected as MPs, although they did secure 3.1% of the total votes cast. Therefore (and this was accepted by the appellant), the terms of s 24 were not met. However, it was argued that the application of s 24 in this way constituted a breach of the European Convention on Human Rights (ECHR) and of EU law.
The First-tier Tribunal decided that the difference in treatment between Mr Banks and an individual who received an exemption under s 24 amounted to discrimination on the grounds of political opinion within ECHR, Art 14 (prohibition of discrimination) taken with Protocol 1, Art 1, the right to peaceful enjoyment of property (A1P1). However, the difference in treatment had a legitimate aim. This was to prevent the abuse of the relief by restricting donations to political parties that play a meaningful role in national political debate.
It was argued by the taxpayer that the means of addressing the legitimate aim was not proportionate because it did not strike a fair balance in the context of the provision of tax relief for the funding of political parties. The differential treatment could not therefore be objectively justified by reference to the current conditions in s 24.
However, s 24 could not be interpreted under the Human Rights Act 1998, s 3 in a way that was compliant with Mr Banks’ ECHR rights. In essence, this was ‘because the First-tier Tribunal said it was not equipped to choose between the possible options put forward by Mr Banks’.
Further, it was held that the Treaty on European Union (TEU), Art 4(3) did not give rise to any directly enforceable right.
Upper Tribunal decision
Mrs Justice Falk and Judge Timothy Herrington sitting in the Upper Tribunal began by rejecting the idea that there was direct discrimination in this case because, on the face of it, s 24 can apply to any political party. The example given by the Upper Tribunal was that it would have applied in the same way to an identical donation to the Green Party and therefore did not directly target UKIP. However, the judges also held that there was no indirect discrimination, in particular because ‘any disproportionality prejudicial effect was on all of those who were supporters of parties that did not meet the conditions at the relevant time. There was no evidence before the First-tier Tribunal to suggest that UKIP supporters were particularly adversely affected as a group.’
Consequently, in concluding that the error in the First-tier Tribunal was a material one, the Upper Tribunal decided to set aside the lower tribunal’s decision and remake it.
The Upper Tribunal went on to consider the justification stage of the analysis, despite recognising that in this particular case it was unnecessary. First, it found that the lower tribunal had erred in describing the aim of the legislation. Although it does promote the private funding of political parties, it is not correct to describe the conditions as being intended to prevent ‘abuse’ of the relief by restricting donations to parties that play a meaningful role within national political debate. The Upper Tribunal held the aim was much more specific, and ‘was to provide tax relief on donations to political parties that are participating in parliamentary democracy, and not in respect of individual independent MPs’. The tribunal described this as a ‘rational and legitimate’ aim.
The Upper Tribunal held that the First-tier Tribunal’s error in identifying the aim of the legislation affected its assessment of proportionality, evident from the reference to ‘abuse’. It concluded that the legislation is proportionate, with the conditions in s 24(2) ‘clearly rationally connected to the legitimate aim we have identified and achieve a fair balance’. It decided to remake this aspect of the lower tribunal’s decision and set it aside on that basis.
The European dimension
In terms of whether there had been a breach of ECHR, Art 14 together with Art 10 (freedom of expression) and Art 11 (freedom of assembly and association), or those provisions individually, the tribunal concluded that it ‘could not see a basis for concluding that there is a breach of Art 14 taken with Art 10 and/or 11 in circumstances where we have concluded that there is no breach of Art 14 taken with A1P1.’
It also held that it agreed with HMRC that the conditions in s 24(2) did not breach Mr Banks’ rights under Art 10 and Art 11 because it was not apparent that the conditions ‘place any restriction on Mr Banks’ freedom of expression within Art 10(1) or freedom of association under Art 11(1).’ The argument that UKIP’s rights had been breached on the same grounds were rejected for the same reasons.
While acknowledging that the above analysis meant there was no need to consider whether s 24 could be interpreted compatibly under the Human Rights Act, s 3 in a way that was compliant with Mr Banks’ ECHR rights, the Upper Tribunal set out its analysis in any event in case the matter went further.
The Upper Tribunal rejected the submissions on behalf of Mr Banks because all the suggestions to reframe the law would, in its view, go against the grain of the legislation and be inconsistent with the fundamental nature of it. This would ‘amount to a legislative exercise of amendment’. It was held that the First-tier Tribunal had not made an error here.
The final issue considered by the tribunal was whether TEU, Art 4(3) gave rise to a directly enforceable right. Not only was it held that there had been no interference with Art 4(3), but it was also considered that the obligations in that legislation ‘do not create obligations of an appropriate nature to be directly enforceable in the context of this case’.
Analysis
In broad terms, a gift made by an individual will be a chargeable lifetime transfer unless it is an exempt or a potentially exempt transfer. This case exemplifies that inheritance tax is not simply a tax on inheritance on death, but can have significant tax consequences in life if the relevant criteria are not met for exemption. The donation to UKIP could not have been a potentially exempt transfer (PET) because only gifts to individuals and some trusts can qualify (IHTA 1984, s 3A).
Here, the donations were made in 2014 and 2015, significantly after the relevant general election in 2010, where it was clear (notwithstanding the ECHR and EU law arguments) that s 24 would not apply. Caution, and potentially legal advice, should therefore be taken before entering into large transactions such as this to avoid a similar, potentially unnecessary tax charge – here, a six-figure tax bill.
The decision also serves to emphasise the clear limits of the Human Rights Act, s 3: it cannot be used by a tribunal as a tool to re-write legislation because to do so would be usurping the role of parliament. Somewhat ironically, the decision also therefore highlights the sovereignty of parliament.
Finally, the judgment outlines the importance of considering carefully the intended purpose of legislation. The Upper Tribunal differed from the lower tribunal in deciding to reference Hansard – while noting the warning by Lord Nicholls in Wilson v First County Trust Ltd (No 2) [2004] 1 AC 816 that the proportionality of legislation is to be judged on the basis of the legislation itself. In my view, this was the correct decision because here it helped the Upper Tribunal to establish more precisely than the lower tribunal the context and origin of s 24, resulting in a materially different (and in my opinion, correct) conclusion on proportionality.
