Why King Charles will pay zero inheritance tax on the Queen’s private fortune

A 1993 deal effectively exempts the monarch from inheritance tax in this situation

Jon Stone
Policy Correspondent
Tuesday 13 September 2022 06:21 BST
King Charles and the Queen Consort board flight to Edinburgh
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As well as inheriting the throne from his mother, King Charles is also in line to receive much of her private wealth.

On top of official crown property, Queen Elizabeth amassed tens of millions of pounds in her own cash and assets – much of it from art and racehorses.

Most people pay 40 per cent inheritance tax on anything they inherit over a £325,000 threshold – meaning the monarchy would be on the hook for millions and the Treasury would be in for a windfall.

Yet King Charles is not liable for a penny due to a deal negotiated between the crown and John Major’s government in 1993, effectively exempting the monarch in situations like this.

How much does Charles inherit from the Queen?

In 2011 The Sunday Times Rich List estimated that the Queen's private fortune was £370m.

But the exact nature of what Charles will be getting is not public because monarchs’ wills are sealed for decades after their death.

The new King is definitely at least in line to take over the ownership of the Queen’s private estate, the Duchy of Lancaster.

This estate, which is valued at more than £650m as of March 2022, will pay him an income of around £24m, as it did his mother. It plays a similar role to that of the Duchy of Cornwall, which he enjoyed as Prince of Wales and will pass on to his son.

What is this tax deal with the government?

The deal confirming the exemption of the monarchy from inheritance tax was never written into law, but was part of a more informal “memorandum of understanding” between the government and the palace. Its official name is the “Memorandum of Understanding on Royal Taxation”.

It makes fascinating reading for anyone interested in the tax affairs of the monarchy.

The inheritance section of the memorandum begins by noting that some royal assets are held by the Queen as “as Sovereign rather than as a private individual” and that “it would clearly be inappropriate for inheritance tax to be paid in respect of such assets”.

Assets of this type include official residences such as Buckingham Palace, the Royal Archives, the Royal Collection of paintings and other works of art.

They are not really the King or Queen’s personal property, but that of the crown and are thus not subject to inheritance tax.

But what about private property and wealth?

The next paragraph of the memorandum also exempts the monarch’s private property from inheritance tax, when it is being passed down as inheritance to the next sovereign.

It says: “In relation to assets which can properly be regarded as private, the arrangements provide that inheritance tax will not be paid on gifts or bequests from one Sovereign to the next, but will be payable on gifts and bequests to anyone else.”

This means that anything Charles inherits from Queen Elizabeth is not subject to inheritance tax.

The memorandum also says that “tax will also not be payable on assets passing to the Sovereign on the death of a consort of a former Sovereign” – an exemption that would have applied to Prince Philip’s assets.

What is the justification for this?

The document gives two justifications: first, it says that the nature of the monarch’s role means that it is important for them to have “sufficient private resources”. Second, it notes that some of the monarch’s private assets are also used for official functions.

As the memorandum puts it: “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.”

It should be noted that while only some of the monarch’s assets have “official as well as private” uses, all of them are exempt from inheritance tax – whether it is Sandringham House or a racehorse.

Nevertheless, the memorandum says that “the government believes that the arrangements set out in the attached memorandum of understanding are fair and appropriate, taking account as necessary of the unique circumstances of the monarchy”.

Does the Queen legally have to pay taxes at all?

The wider context of the inheritance tax memorandum is that the monarchy is not legally required to pay income tax, capital gains tax or inheritance tax at all – because the relevant acts of parliament do not apply to them.

However, the sovereign pays income and capital gains tax on a “voluntary basis” and inheritance tax on the basis described in the memorandum, a basis that did not include the monarch dying and passing their wealth onto the next monarch.

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