Royal Fortunes – How King Charles’ predecessors avoided paying tax

On Armistice Day in 1918, Queen Alexandra, widow of King Edward VII, was a wealthy lady.  She received an annual allowance of £70,000 (£3.9 million in today’s money) and inherited £200,000 (£11.2 million) in capital from her late husband.  But the bejewelled monarch then received a nasty shock.  As taxation rates increased after the Great War, her income tax bill increased from £5,833 (£375,000) to £41,600 (£2.6 million).

Like her profligate late husband, Queen Alexandra was extravagant and carefree about her expenditure.  She spent her money on the assumption the taxpayer would bail her out if she exceeded her budget.  In early 1920, when asked to economise, the former monarch replied impatiently: “I don’t care, I shall do as I please.  If I get into debt, they can pay”.  By ‘they’, she meant the government.  And the Treasury duly obliged.  That summer ‘they’ exempted the first £50,000 (£2.8 million) of her annuity from tax.  But this was insufficient for the free-spending Queen Alexandra and so the next year her annual tax exemption was increased to £64,000 (£3.9 million).

I was reminded of Queen Alexandra’s imperial view of royal finances when I read the recent ground-breaking investigation by the ‘Sunday Times’ Insight team and Channel 4’s ‘Dispatches’.  Based on painstaking research, their investigation revealed the full details of the property estates owned by King Charles and Prince William and, crucially, their tax-free business deals they negotiated to maintain their wealth.  The royals operate as commercial landlords as the Duchy of Cornwall (Prince William) and Duchy of Lancaster (King Charles) and receive private income from the profit generated by these duchies.  But, as the Sunday Times and Channel 4 disclosed, their fortune is expanded by a special agreement with the Treasury which exempts them from paying tax on their corporate profits, although the individual royals pay income tax on “a voluntary basis”.

It is often assumed the royal family have always been tax-free.  In fact, Queen Victoria and her children paid income tax from their Coutts bank accounts.  But revenues from trade with the USA and Hanover depleted the nation’s finances as well as the Duchy of Cornwall.  And so, in 1842 her husband Prince Albert took control of the Duchy of Cornwall’s estates which was then in a perilous state and brought it back from the financial precipice.  He restored the Duchy’s finances and properties and established the foundations on which the Duchy is based today.  And in 1849 – unlike today – the Duchy of Cornwall started paying tax.  

Based on Prince Albert’s astute management, the Duchy of Cornwall prospered and in 1862 the Prince of Wales, the future King Edward VII, was entitled to both the income and the accumulated surplus from the Duchy of Cornwall.  At the age of 21, Prince Edward suddenly had access to an estimated £50 million fortune (based on today’s figures) plus an annual income of approximately £6 million.  He promptly bought the Sandringham estate in Norfolk.

But on inheriting the throne in 1901, King Edward VII complained bitterly about paying income tax and claimed his mother had been deceived.  His son, King George V, the last imperial monarch, refused to pay tax and argued “Crown Immunity” absolved him of this onerous obligation.  The Treasury complied and in 1910 the Royal Family no longer paid income tax.

The Duchy of Cornwall followed suit and in 1913 refused to submit a tax return and also claimed it enjoyed Crown Immunity.  This was despite a recent assurance by the Chancellor, Lloyd George, to parliament the Duchy would continue to pay tax.

Despite the Duchy of Cornwall now being tax-free, the Duke of Cornwall – by now Prince Edward, later the Duke of Windsor – continued to pay tax on the Duchy’s revenues.  For example, between 1915 and 1918, the Duchy transferred on average an annual payment of £65,625 (£3.8 million) to the Royal Treasury.  After tax £49,125 (£5.3 million) was paid to Prince Edward.

However, by 1921 the Royal finances were in peril and chaos.  The Royal Household was in despair at the virtual bankruptcy of the Civil List.  Extravagance, waste and corruption had resulted in a deficit of £65,000 (£3.9 million in today’s money).  In essence, the Royal Family was broke.  The King’s financial advisors concluded that unless the Civil List was increased by £110,000 a year (£6.78 million today), the Royal household would be insolvent. 

It was only professional and creative fiscal management and judicious spending cuts by Sir Ralph Harwood, the King’s deputy treasurer, that resolved the crisis.  Sir Ralph also persuaded the Law Officers the younger children of King George V should be “free of the annuities of income tax and super tax”.  

The Prince of Wales, later King Edward VIII and then the Duke of Windsor. In 1921 he secretly lobbied the Treasury to avoid tax and reluctantly agreed to pay a voluntary annual contribution.

Despite the perilous state of the royal finances, the Prince of Wales wanted to avoid paying tax on his revenue from the Duchy of Cornwall.  And so in 1921 he secretly lobbied the government for this exemption.  A Treasury document marked ‘Secret’ and obtained by Philip Hall, author of ‘Royal Fortune’, revealed what happened.  The Prince complained to the Treasury about “the higher cost of repairs and similar outgoings” of managing the Duchy of Cornwall.  “The burden of taxation has enormously increased”, he wrote and pleaded for a much-reduced tax liability. 

After consulting the Law officers, the Treasury authorised an unusual arrangement.  The Duchy tenants continued deducting tax and dutifully paid it to the Inland Revenue who then refunded it to the Prince of Wales without the tenants or anyone knowing about it.  But clearly the Royal Family and government felt uncomfortable with the Prince being totally exempt from paying tax. 

And so, in 1921 the Prince agreed to pay the Exchequer £20,000 a year (£1.2 million) as “a voluntary contribution, subject to variation as might seem desirable”.  This saved the Prince £15,000 (£920,000) in the first 12 months and more in subsequent years.  As the profits and revenues from the Duchy of Cornwall increased, the Prince acquired a vast personal multi-million fortune which enabled him to live a life of luxury as a tax exile in France after he abdicated as King in 1936.

This new arrangement was kept secret.  There was no declaration to the House of Commons by the Chancellor, Sir Robert Horne.  And the accounts of the Duchy of Cornwall (and Lancaster) were suddenly withheld from publication (they were freely available through the government’s stationery office until 1921).  The accounts were not published again until 1982 and even then, according to the historian Philip Hall, deception was employed in the filings.  “The £20,000 voluntary contribution was included under the heading ‘taxes and parish rates’ in the accounts to make it seem the Duchy was still being taxed”, wrote Hall in ‘Royal Fortune’.  “A curious piece of accounting practice for a body that claimed and got tax exemption”.

The voluntary tax contribution by the Duke of Cornwall (currently Prince William) remains the position today and the Duchy are also not liable to capital gains tax or death duties.  The current King’s fortune of £610 million is largely due to generous tax exemptions when he was the Duke of Cornwall.  But its origins can be traced back to the secret deal 100 years ago by his predecessor, the Duke of Windsor.

Mark Hollingsworth is currently researching a book about the wealth and finances of the Duke of Windsor.