How do political donations impact inheritance tax?

Making a political statement with your wallet can be an expensive endeavour and, as a recent  First-Tier Tribunal case proves, it can also lead to an unexpected inheritance tax (IHT) bill. This case lays out a crucial roadmap for donors and political activists on how IHT law addresses political donations and the strict limits of human rights arguments in tax disputes.

Background:

Mr. Hosking is a successful businessman who has donated over £1.7m to various "Leave" campaign groups between 2011 and 2016. Mr. Hosking believed that these contributions were either part of his regular charitable giving or otherwise should be exempt as political donations. As he was a wealthy individual with an income far exceeding his living expenses, he argued that these gifts should fall under the "normal expenditure out of income" exemption.

HMRC disagreed, issuing a tax demand for over £349,000. They argued that ‘Vote Leave Ltd.’ and ‘Labour Leave Ltd.’ did not meet the strict legal definition of "qualifying political parties". Further, they contended that his donations were too irregular and sporadic to be considered "normal" expenditure. Mr. Hosking challenged this in court, arguing that the tax charge was discriminatory and interfered with his human rights to free expression and political opinion.

Decision:

The Tribunal dismissed the appeal, reinforcing a strict interpretation of the Inheritance Tax Act (IHTA) 1984. First, the Court examined Section 21, which exempts gifts if they are "normal," derived from surplus income, and leave the donor with sufficient to maintain their lifestyle. While Mr. Hosking was clearly wealthy enough, the Court found that his giving lacked a "settled pattern". Under the legal test established in the case of Bennett v IRC, a gift is only deemed to be "normal" if it follows a predictable formula or a prior commitment. Since Mr. Hosking’s donations fluctuated wildly and were tied to a unique historical event—the Brexit Referendum—they were considered "abnormal" for tax purposes.

The Court then turned to Section 24, which provides an exemption for gifts to political parties. To qualify, a party must have at least two MPs in the House of Commons, or one MP and 150,000 votes. The Tribunal ruled that this exemption is reserved for the machinery of Parliamentary democracy and not intended for independent pressure groups or "permitted participants" in a referendum. The Judge also rejected the human rights arguments presented, stating that, while Articles 10 (freedom of expression) and 14 (prohibition of discrimination) of the European Convention on Human Rights (ECHR) are fundamental, they do not grant a donor the right to a tax break. The Tribunal held that tax laws are a matter for Parliament and, so long as they apply to everyone equally, they are not discriminatory.

Implications:

This judgement has significant implications for philanthropists. It clarifies that the "Normal Expenditure out of Income" exemption under Section 21 of the IHTA 1984 is not a catch-all for any gift made by a wealthy person. To successfully claim this relief, donors must demonstrate regularity of contributions. This typically requires documented evidence of a "settled pattern," such as a commitment to give a fixed percentage of income or a consistent annual sum. If your giving is reactive or else fluctuates based on current events, then you risk losing the exemption.

Further, the case highlights a critical distinction between supporting a political party and supporting a political cause. Under Section 24, the tax system favours established political parties with a presence in Westminster. Donating to a pressure group, a think tank, or a specific campaign—no matter how influential—will likely result in an IHT charge if the quantum of the gift exceeds your nil-rate band. Finally, this ruling underscores the precept that human rights claims under the Human Rights Act (HRA) 1998 rarely provide a successful shield against tax legislation. For those wishing to engage in large-scale political or social giving, the lesson is clear: professional tax planning must happen before the cheque is written, ensuring that support for a cause does not create an unintended liability for your estate.