The recent protests by farmers over changes to the rules on inheritance tax have raised questions over who, if anyone, should be exempt from paying it – including exemptions which benefit King Charles, as an episode of Newsnight has recently highlighted.

In the UK inheritance tax is currently paid at a rate of 40% on the value of an estate over a £325,000 threshold. In ordinary circumstances, this would have meant that the Treasury was in for a multi-million pound windfall when the late Queen died. But, like countless monarchs before him, not pay a penny of inheritance tax was paid on the £650 million fortune King Charles inherited from the late Sovereign.

Under the long-standing “Crown exemption” rule, the Crown is not bound by statute unless that statute explicitly provides to the contrary. The rule has exempted the monarch’s estate from the payment of inheritance tax for centuries and, as the legislation currently in force, the Inheritance Act 1984, does not explicitly provide to the contrary, continues to do so to this day. Historically, this rule also exempted the monarch from paying income tax and capital gains tax, and even today the monarch is still under no legal duty to do so. However, following a period of intense scrutiny of the royal finances in 1993, sparked by anger from taxpayers at being asked to pay for repairs to Windsor Castle which had been damaged by fire earlier in the year, the late Queen voluntarily agreed to begin paying both income tax and capital gains tax. However, under the “Memorandum of Understanding on Royal Taxation” (“the Memorandum”), originally signed by the then Prime Minister, John Major, and the Palace, it was agreed that no inheritance tax would be payable on assets held by the Queen as sovereign, such as the official royal residences. It was also agreed that no inheritance tax would be paid on gifts or bequests passed “sovereign to sovereign”.

The big question is why?

The Memorandum gives two justifications:

 The reasons for not taxing assets passing to the next Sovereign are that private assets such as Sandringham and Balmoral have official as well as private use, and that the Monarchy as an institution needs sufficient private resources to enable it to continue to perform its traditional role in national life and to have a degree of financial independence from the Government of the day.

In essence, therefore, the inheritance tax exemption was justified on the basis that (i) some of the monarch’s private assets also have an official function which means they need to be protected, and (ii) the nature of the monarch’s role means that it is important for them to have “sufficient private resources” and “a degree of financial independence from the Government”. The Memorandum concludes that “the Government believes that the arrangements set out…are fair and appropriate, taking account as necessary of the unique circumstances of the monarchy”.

Speaking on Newsnight, a Treasury minister stated that the Government has no plans to make it compulsory for inheritance tax to be paid on the monarch’s estate. But should it? Do the justifications given in the Memorandum stand up to scrutiny 30 years on?

The answer, arguably, is ‘no’.

Let’s take the first justification. Speaking in Parliament at the time, John Major explained that inheritance tax should not be payable on the monarch’s estate as it could otherwise lead to official royal estates such as Balmoral and Sandringham being “sold off within a generation or two” – what he referred to as ‘salami-slicing’. But, contrary to what the Memorandum says, these ‘circumstances’ hardly seem ‘unique’ enough to justify the exemption: after all, inheritance tax has still been imposed on farmers despite them voicing the very same concerns in relation to their small family farms. The author Robert Hardman notes that fears over royal salami-slicing did not “elicit much sympathy from the general public” (Robert Hardman, Queen of Our Times: The Life of Elizabeth II (Macmillan, 2022), 345). By contrast, concerns that changes to inheritance tax will break up generations-old farms do appear to enjoy strong backing, with nearly 60% of people supporting the farmers’ protests. This would suggest that the first justification may not find favour with the British public.

The second justification seems equally unconvincing. Charles himself is on record as having stated that it is of “absolute importance that the monarch should have a degree of financial independence from the State.” Professor Vernon Bogdanor agrees, arguing that without financial independence, “the Sovereign would be unable to fulfill his or her constitutional functions effectively” (Vernon Bogdanor, The Monarchy and the Constitution (OUP, 1996), 195). However, there is a strong case to be made that Charles already possessed ‘sufficient private resources’ which gave him more than just ‘a degree of financial independence’ to begin with, even without the inheritance tax relief: prior to the late Queen’s death, Charles’ personal fortune was estimated at somewhere between £85 million to £320 million. The thought of one man, already in possession of such wealth, inheriting an estate worth £650 million on which not a penny’s worth of inheritance tax was paid, from one of the wealthiest women in the world, is unlikely to strike many people as instinctively ‘fair or appropriate’ to say the least, especially at a time when millions continue to face acute economic hardship and cost of living pressures. Indeed, announcing the exemption from inheritance tax in the House of Commons, John Major defended the decision as being “the overwhelming wish of people in this country”. Yet 30 years on this no longer appears to be the case: a YouGov poll conducted at the time of the late Queen’s death showed that almost two thirds (63%) of people believed that inheritance tax should have been paid on the vast estate King Charles III inherited, which has subsequently seen his own personal fortune rise to an estimated £1.8 billion. This sentiment is only likely to have since grown as Charles’ private resources have increased. For example, many more may now think it entirely fair and appropriate to ask Charles to contribute towards improving the very public services which the recent Channel 4 and Sunday Times investigation found are being used as ‘cash cows’ by his Duchy of Lancaster estate.

Moreover, it may also be seen as fair and appropriate to ask the monarch to top-up the public purse through the payment of inheritance tax given how much the monarchy takes out. For example, the Sovereign Grant used to fund the monarchy cost the British taxpayer £86.3 million for the financial year 2023-24. This figure is set to rise thanks to a ‘generous’ formula introduced in 2011 to calculate the Sovereign Grant by linking it to profits made by the Crown Estate was, which has resulted in a sharp rise in the amount of public money going to the monarchy over the last decade. And finally, just this month, it was revealed that King Charles’ Coronation cost the taxpayer an additional £72 million.

Therefore, there is a strong argument to be made that the monarch does not enjoy ‘unique circumstances’, that the exemption from death duties is no longer ‘fair or appropriate’ and that inheritance tax should be paid on the monarch’s estate. But as the Government has ruled out making it compulsory for him to do so, could King Charles follow in the footsteps of his late mother and voluntarily pay inheritance tax (or an equivalent sum to the amount which would otherwise have been paid from the late Queen’s estate) by changing the terms of the Memorandum?

The answer is ‘yes’. Although the Memorandum states that it is intended to “continue indefinitely”, it also allows for the possibility of “variation or termination of the arrangements”. Clause 2.33 reads that “the King…may, at any time, give notice to the Government of withdrawal  from these arrangements with effect from the following 6 April, or any later date,” thus opening the door for Charles to unilaterally alter the arrangements as he wishes. The Memorandum notes that, as Prince of Wales, Charles indicated that he would adhere to the arrangements agreed by his late mother upon his succession to the Throne; however, we also know that he has “reforming instincts”, and Charles does seem to be aware of the need to change the way things have been done before in order to reflect the national mood. For example, in 2023 the King redirected a surge in profits from a Crown Estate windfall farm to be used for the “wider public good” rather than as extra funding for the monarchy as it would otherwise have been, a move which came just a month after he had highlighted the cost of living crisis faced by the country in his Christmas message. In light of the heightened scrutiny of his tax affairs which seems likely following the changes to inheritance tax rules for farmers, it does not seem out of the question that Charles could indeed choose to make ‘variations or terminations’ to the arrangements in the Memorandum in the future.

At the time the Memorandum was introduced, there was also much academic debate as to whether the arrangements contained therein had created a new constitutional convention. The consensus was that it did: Pearce-Crump, for example, concluded that “all the evidence…seems to point to the fact that a new convention has been born” (Donald Pearce-Crump, ‘Royal Taxation’ (1994) British Tax Review 635, 646). However, this would not be an insurmountable obstacle to the King varying or terminating the arrangements in the Memorandum: it is the nature of constitutional conventions that they are not binding and need not be followed unconditionally. Indeed, this flexibility is seen as one of the benefits of conventions since, as a Parliamentary Committee has found, they can be set aside “as circumstances change”. This is echoed in the Memorandum itself, which states at Clause 2.34 that “it is recognised that it might be appropriate to agree variations if circumstances change.” As circumstances which seemingly justified the exemption at the time do appear to have changed 30 years on, it appears that this is a convention with which Charles could break if he so chooses.

The blanket exemption from paying inheritance tax is a significant advantage to which only the monarch is entitled. However, three decades on from when the Memorandum was drawn up, there is a strong case to be made that the monarch does not enjoy ‘unique circumstances’ which continue to make it ‘fair and appropriate’ for him to benefit from this constitutional exceptionalism today, especially in light of arguments we have recently heard from farmers in the wake of changes to inheritance tax affecting them. It was public protests over the cost of refurbishing Windsor Castle coupled with revelations about Crown exemptions that made the late Queen rethink her tax affairs – 30 years on, it may well be the farmers’ protests that makes her son rethink his.

I am grateful to the editors of the UKCLA Blog for their helpful and incisive comments on an earlier draft. Any errors or omissions are my own.

Francesca Jackson is a PhD student at Lancaster University.

(Suggested citation: F. Jackson, ‘Should the Monarch Pay Inheritance Tax?’, U.K. Const. L. Blog (2nd December 2024) (available at https://ukconstitutionallaw.org/))

*Editors’ note – the original post was amended on 2 December 2024 to clarify the legal position concerning the payment of inheritance tax from the estate of the deceased rather than by the recipient(s) of bequests