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Royal Finances

12.30 pm

Norman Baker (Lewes): I am grateful for the opportunity to have half an hour to discuss with the Minister royal finances and the Government's attitude toward them.

I recognise that the present arrangements are steeped in antiquity in many ways, and that some aspects have been unchanged for centuries. However, other aspects were adversely changed, from the point of view of the taxpayer, during the 20th century. The key argument that I shall deploy is that the arrangements are unsuitable for the 21st century, and I am keen to persuade the Government of that point of view. I recognise that there have been publications in recent days relating to royal finances. That is a step forward, and if the Government had any say in encouraging that, I congratulate them on taking that line.

The basis of my argument is that all citizens in this country should be treated equally on taxation—I include the Queen as a citizen, if I am allowed to do that. Royal finances should be transparent, as one would expect because public money is being spent. I make a distinction between matters that are properly private finances and those that are public finances. There should be proper control and auditing of the way in which public money is spent on royal finances, which is the case for every other area of public expenditure. There is no reason why royal finances should be different.

I shall address equal treatment. It is difficult to justify one individual, who happens to be the Head of State, having absurdly preferential terms of tax payment compared with other people in the country, particularly since the person who holds that office happens to be very rich. How can it be justified that the monarch is exempt legally from income tax, capital gains tax, inheritance tax and requirements to which everybody else in the country must conform? That position seems to be indefensible.

I accept that the 1993 memorandum of understanding under the Conservative Government represented a step forward and attempted to regularise the position. However, the memorandum outlined a situation in which the present Head of State—the principle does not extend into the future, except in so far as it relates to the Prince of Wales, who also agreed to the memorandum—agrees to pay voluntarily income tax and capital gains tax, but not inheritance tax. Of course, the Queen therefore received an estimated windfall of between £20 million and £25 million due to the sad death of her mother. That represents a great loss to the Chancellor, and as he is notoriously prudent in his attempts to control public finances, no doubt he did not welcome that big hole appearing in the Government's income stream.

The memorandum was presented as a step forward in 1993, and recognised matters by putting them on paper. However, George III paid income tax when it was first introduced in 1799—there was nothing exceptional about that. When income tax returned in 1842—it was abandoned for a period—Queen Victoria and Edward VII paid it. The requirement of the monarch to pay income tax was removed only during the reign of George V in the last century in exchange for paying the costs of

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visiting Heads of State. The idea that monarchs are exempt from income tax is not traditional, but a recent idea from the last century.

During George VI's reign in 1937–38, his requirement to pay income tax on his private income was removed. I tried to find out more about that after being directed to it by various august publications, but I understand that the relevant files on the agreement have been destroyed. I wonder whether the Minister can confirm that. It would be very unfortunate if those files have been destroyed.

The 20th century has been seen as a time when steps were taken to regularise royal finances by bringing them into line with the taxes and arrangements applicable to everyone else in the country. Actually, however, the arrangements are even more beneficial to the holder of the office of Head of State.

The 1993 memorandum of understanding says that the present occupant of the post will pay income and capital gains tax voluntarily. It is not clear, however, at what level that tax will be paid. It is not mentioned in the memorandum, the justification being that it is improper to discuss individual tax arrangements. I would be happy to accept that argument were normal taxation arrangements to apply to that individual as to all others. However, as the arrangements are unique, we have a right as taxpayers to know what they are.

I should be interested to know what the voluntary arrangements have meant in practice since 1993. Do income tax payments made by the present monarch correspond to those that would be required were she subject to mandatory taxation requirements, as everyone else in the country is? Or, for example, has she sought not to pay the 40 per cent. top rate? That needs clarification, because it is not clear from the memorandum of understanding.

From my understanding of the document, voluntary tax could be a very low taxation yield indeed. It could even voluntarily disappear altogether. There are historical precedents for taxes voluntarily being paid by members of the royal family and those contributions subsequently withering on the vine. Unless the Minister tells me otherwise, we have no guarantee that taxation is paid as it is by a normal citizen, and that that practice will continue.

Equal treatment is a matter of fairness and equity. It is—dare I say—in line with the Government's general philosophy towards the application of taxation. Therefore, I hope that the Minister will be sympathetic to those points. Historically, such arrangements are not ancient, as I have said. Many are the benefits that the Government of the day were persuaded of during the 20th century—Parliament had little say in the matter. Paragraph 31 of the 1993 memorandum of understanding states that arrangements can be changed at the will of the monarch—not the Government. I therefore wish to ask the Minister whether that clause has been invoked since the memorandum was introduced.

I have dealt with the first point—that of equal treatment for citizens. The second point of principle is one of transparency. Again, no doubt largely due to historical accident, there is not the transparency in royal finances that we would wish. Certainly, there is not the transparency that would apply in other areas of public

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finance. For example, the status of the Duchies of Cornwall and Lancaster is unclear. The Duchy of Cornwall is entitled to benefits that are allegedly given away to the monarch, even though the title is traditionally held by someone else. Even if a case could be made for unique taxation benefits for the monarch, it is unclear why they should also be extended to the Duke of Cornwall.

The Duchy of Lancaster is regarded as a private income for the monarch, yet there is confusion about which elements of the privy purse are used for public and private purposes. That is unclear and needs to be made clear. It is also historically unclear why Duchy of Lancaster lands and assets were not transferred, as the Crown estates were, to Parliament in 1760, and why they subsequently retained that unique status.

The status of other assets held

such as the royal collection, is unclear, too. What is the Minister's understanding of the status of those assets? My understanding is that they are state, or public, assets that are owned by this country's citizens but happen to be held for the country by the monarch of the day. That would seem to be justified by the fact that they are not subject to the taxation treatment expected of private assets. In the unlikely event that this country becomes a republic at some distant point, would assets such as the royal collection pass to the state, or to the deposed monarch? It would help if the Minister would confirm that they are state assets, so that we are clear about the status of the royal collection and other such matters.

We also need a public inventory of assets held in that way, such as the royal collection, that are regarded not as the private property of the Queen or whoever happens to be Head of State at the time but as being held by the Queen or monarch for the public good. We need to make it clear what is public, and a public inventory of such assets would help.

It would also help if the Minister would make clear the position of gifts. My understanding is that gifts provided by the monarch or members of the royal family for visiting Heads of State are paid for out of public funds, although I am not sure whether from the privy purse or the civil list. Is that so? Do gifts received by the monarch in return from visiting Heads of State become public property, or are they regarded as the Queen's private assets? I am sure that the Minister would agree that it would be invidious if the state pays for gifts but the Queen keeps gifts that she receives, and I hope that she will tell me that that is not so.

Transparency requires public scrutiny of the accounts. I recognise that we are moving towards that, but we are not there yet. It requires the National Audit Office and the Public Accounts Committee to be involved, just as they are in the case of other major pockets of Government expenditure. I see no reason why royal finances should not be subject to that rigour. Knowing how keen the Chancellor is to have tight control of public finances—he does well in doing so, in many respects—I cannot believe that he is happy with such a loose arrangement that involves many millions of pounds.

On proper control of public money, it is appropriate to look at the civil list. I notice that £37 million has built up in balances—a huge amount. Indeed, it increased last

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year, from £35 million, as it is gaining interest and is not being spent or reclaimed by the Government. The reason for that goes back to 1990, when an absurd settlement was reached that allowed an inflationary increase of 7.5 per cent. a year. That was welcomed by the then Prime Minister, Margaret Thatcher, and the then Leader of the Opposition, Neil Kinnock. It was left to some of the Minister's Back-Bench colleagues to question whether a 7.5 per cent. inflation estimate was sensible. They turned out to be right to do so, because it was not, and a huge balance has built up over that period.

We need to be able not simply to freeze the civil list, as that allows balances to increase, but to find a mechanism to reclaim some of the money held there, return it to the Exchequer and use it for decent public purposes. I would welcome the Minister's comments on that.

The civil list should recognise the contribution of the Head of State, his or her spouse and the heir to the throne. It is inappropriate in the 21st century for it to be so exhaustive and to include so many minor royals. That arrangement may have been appropriate 200 years ago, but it is not appropriate today. It also reflects the fact that the present royal family, notwithstanding the spin from the palace that they cost us only 58p a year each—that does not, however, include all the tax breaks—is more expensive than other European monarchies.

This debate has been not about whether we should have a monarchy, but about equal treatment of everybody's finances, transparency and proper control of public money—matters that the Government hold dear. To those who think that the debate is about the monarchy, it could be argued that the changes that I advocate would do more to solidify the foundations of the royal family and the monarchy than do the present arrangements, which leave them open to justifiable criticism on financial grounds.

12.45 pm

The Paymaster General (Dawn Primarolo) : I thank the hon. Member for Lewes (Norman Baker) for the clarity with which he advanced his arguments and sought information about the royal finances. I spoke to him briefly before the debate and will endeavour to answer his every question. However, if, in scrutinising the record afterwards, he finds that I have missed anything or run out of time, I will certainly write to him.

The hon. Gentleman talked about unique arrangements, the importance of transparency, and the auditing arrangements. He then asked specific questions about those arrangements. He asked why Her Majesty the Queen's circumstances have changed with regard to the agreement's being voluntary, whereas her predecessors may have paid. However, such payments have always been purely voluntary and, over the years, as the burden of taxation increased and the monarchy's financial position changed, successive sovereigns have had to take a view on how far that voluntary agreement went.

The hon. Gentleman has considered the memorandum of understanding carefully, which details the voluntary arrangements on income tax, capital gains tax and inheritance tax for the Queen and His Royal Highness the Prince of Wales. I draw the hon.

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Gentleman's attention to that issue in particular, because, as he rightly said, the debate is not about whether we should have a constitutional monarchy, but about public finances. It is important to draw clear lines between private moneys in the tax system and those assets that are held by the sovereign on behalf of the nation. However, paragraph 9, under the inheritance arrangement, states towards the end 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. That principle must be balanced with the principles on which the hon. Gentleman concentrated: transparency and paying tax in the circumstances in which other citizens do.

The basis for the memorandum of understanding is the long-standing rule of statutory construction that statutes do not bind the Crown, including the Queen in her private capacity, unless they are expressly enabled to do so by necessary implications, and legal advice has confirmed that. The arrangements in the memorandum were discussed and agreed between the Government and Her Majesty. At the time the Government said that they welcomed the Queen's and the Prince of Wales's offer to pay tax voluntarily, and that the arrangements in the memorandum were a fair and proportionate way in which to take that into account. In law, the sovereign is not liable to pay unless required explicitly to do so by an Act of Parliament. Given that the sovereign is entitled to the revenues when there is no Duke of Cornwall, Crown exemption applies also to income received by the Prince of Wales from the Duchy of Cornwall.

Since 1993, Her Majesty the Queen and His Royal Highness the Prince of Wales have paid tax on voluntary arrangements agreed with the Government. That means that most sources of income, such as private investment income money, profit and losses from farming at, say, Sandringham, Balmoral and Windsor, or from opening to the public the houses and gardens at Sandringham and Balmoral, are dealt with in accordance with the usual tax rules. However, the memorandum of understanding includes special arrangements. The hon. Gentleman asked whether income tax is paid at the usual level, and the answer is yes. Capital gains is another example. It is not a negotiable lower rate.

Income tax is paid on all private sources of income. The memorandum of understanding includes provision for calculating the private taxable proportion of the Prince of Wales' income from the Duchy of Cornwall. Tax is also paid on the Queen's privy purse income, which includes income received from the Duchy of Lancaster to the extent that it is used for personal purposes. The hon. Gentleman asked a specific point about that and I shall write to him.

The memorandum of understanding provides for capital gains tax to be paid on gains from the disposal of private assets and on the private proportion of capital gains on the assets of the privy purse. Assets of the Duchies of Lancaster and Cornwall do not belong to the Queen or the Prince of Wales and are not theirs to dispose of. The duchies may sell assets from time to time, but the policy is to apply any proceeds to maintain their capital base for the future. Capital gains are not

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distributed and, under the terms of the memorandum, there is no capital gains tax in such circumstances. The position is not dissimilar to rollover relief that exists within the system.

As for inheritance tax, the memorandum of understanding recognises the need for assets to pass to successive sovereigns if the monarchy, as an institution, is to continue to play its part in the nation's affairs and to have some financial independence. It therefore provides for assets to pass from one sovereign to another without the payment of inheritance tax, but if the sovereign makes gifts or bequests to another person other than the new sovereign, the normal inheritance tax rules operate as they do for all members of the community. There are no special rules for other members of the royal family. They are fully liable to tax on the same basis as the rest of us.

The hon. Gentleman kindly drew attention to the fact that the civil list annual report has been published for the first time. It now joins the annual reports on grant in aid for the maintenance of occupied royal places and grant in aid for royal air and train travel. Such documents are available for scrutiny. The audit position was endorsed by Ministers as recently as 1998 after consultation with the then leader of Her Majesty's Opposition. That reflects the clear and long-standing bipartisan policy that accounts should not be laid before Parliament, or be subject to national audit scrutiny. However, the accounts are audited in accordance with the high standards of all auditing—and how the money is spent is also thoroughly explained.

The hon. Gentleman asked whether the memorandum had been varied in any way in recent years. It might amuse him to learn that minor changes have been made to take account of the introduction of the self-assessment system. Those are the only changes. That reinforces the point that—except in the unique circumstances of transfer from sovereign to sovereign—the usual tax system operates.

The hon. Gentleman also asked about gifts received. He has not yet been given responses to a parliamentary question that he asked about that, and to a parliamentary question on a different matter, and I apologise to him for that. We have not yet received all of the information that he asked for, and we are checking what we have received, but his question will be answered. Gifts received in an official capacity belong to the nation; if Her Majesty receives a gift when she is performing her official role, that belongs to the nation. However, gifts received in a personal capacity are subject to the usual tax rules.

The hon. Gentleman asked about the art collection and, for instance, the use that is made of the revenue from entry fees into the palaces. I have forgotten the name of the charitable trust that was mentioned. I hope that the hon. Gentleman will forgive me for that, but I shall write to him about it. There are other relevant issues, such as the exact terms of the holding of the works of art on behalf of the nation, the obligation to maintain them, and the use of those monies to contribute to that.

The hon. Gentleman also asked about the surplus in the civil list. He may well have views about whether the agreement of 10 years ago should have been struck, but it was, and it must be honoured. A surplus has arisen,

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and I understand that it is being used to pay for maintenance of the palaces and public buildings. I believe that the contribution is about £7.5 million, and that the rest is drawn down from the surplus. However, I shall double check all of that to ensure that he receives accurate information.

I come now to the matter of the civil list and annuities. The Queen repays directly to the Treasury—and back into the Consolidated Fund—the annuities for all the members of the royal family, other than those paid to the Duke of Edinburgh in relation to his official duties. Therefore, the hon. Gentleman can see that in all respects—with the exception of the exclusion of inheritance tax due to the unique circumstances of transfer from sovereign to sovereign—the usual rules of the tax system that would be applicable to the rest of us are followed. The provisions with regard to transfer from sovereign to sovereign are a recognition of the role of the monarchy, and they seek to maintain its independence from the Government of the day.

As time is short, I undertake to double check the accuracy of my answers to the hon. Gentleman's questions and, if there are any questions that I have not answered in this brief response, I shall ensure that he receives that information. I am grateful to him for the way that he has pursued this morning's debate, and the straightforward and supportive fashion in which he has genuinely sought information on an area that is of interest to all our citizens who have celebrated the great contribution that Her Majesty the Queen has made to our nation with her and her family in this jubilee year.

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