Taxing times for Charles and the princes

Once again the Royal Family finds itself caught between several rocks and a hard, if ermine-lined, place.

The death of Diana, Princess of Wales, leaves her sons facing an inheritance of lotteryesque proportions and a tax bill to match. But the Prince of Wales has ruled out using a legal device which would have saved millions for the young princes - albeit at the taxpayers' expense.

At the same time, the Windsors face losing one of their royal homes. The matter under debate, royal sources claim, is whether Kensington Palace or Buckingham Palace (gift shop pictured) should be turned into a "people's palace" - a memorial to the Princess of Wales and a new home for the royal art collection.

The question of Diana's inheritance has already taxed the finest legal minds. Before her pounds 17m divorce settlement in 1996, which was invested to make pounds 3m in a year, Diana was worth pounds 1m. The total value of her estate when she died was around pounds 21m.

With inheritance tax at 40 per cent, the Exchequer will claim pounds 8.4m for public funds despite a legal precedent which could have benefited the young princes. Charles, acting for his sons, could make a so-called "Barder" application, under which he would have asked the court to allow him to reclaim the pounds 17m he paid the princess in a settlement when they divorced. That money would then have been put into a trust for Prince William, 15, and 13-year-old Prince Harry.

In the 1987 legal precedent of Barder v Barder, a divorce settlement was overturned in the courts following the death of a former wife barely a month after the settlement was agreed.

But a spokeswoman for Prince Charles said: "There will be no Barder application. We are keen that all tax dealings should be seen as straightforward and that there should be no question of the Royal Family receiving preferential treatment."

There have been suggestions that Princess Alice, 96, and Princess Margaret, who live at Kensington Palace, would move out of Diana's former home.

Buckingham Palace said yesterday there were "no short-term plans" to create a "people's palace" in Diana's memory or to turn the palace into a new home for the royal art collection.

However, senior royal sources indicate that the Windsors are resigned to the inevitability of losing at least one house. No formal decisions have been made yet, and are unlikely until the New Year. But privately, some believe that this is the role which Kensington Palace will have.

The main reason for this is apparently Prince Charles' wish to have "as little as possible" to do with the place since the death of Diana. He is said to feel it only holds sad memories for William and Harry.

Yet royal sources maintain that the younger royals prefer the more informal Kensington Palace to Buckingham Palace.

Some advisers also feel that Buckingham Palace would be a much more lucrative revenue earner than Kensington Palace, particularly among tourists in whose minds Buck House is synonymous with British royalty.