Why the Telegraph’s criticism of John Mills donation to Labour wasn’t quite right

The Telegraph released a story earlier accusing Labour donor of Tax Avoidance over his donation to the party (and George Osborne took a break from not fixing the economy to wade in). The “revelations” were clearly designed to distract from Ed Miliband’s speech this morning – but how accurate were the allegations?

Here are a few things to bear in mind:

• Mills didn’t give the party a gift from income, he gave the party a gift of part of his wealth – and wealth isn’t taxed like income. Therefore  the very premise of the story is a bit flaky. 
• Mills has forgone the rights to any future gain or income arising from those share – an effective disposal of a capital item – shares.
• The Labour Party has not received £1.65 in unencumbered cash.  Until Mills decides to sell the company, or approves a buyer of the shares it will only get a dividend stream of x pence per share like any other shareholder, which as Ed Miliband said today, the party will pay the approriate tax on.
• It may be true that, provided the Labour Party makes a loss, the dividend will be tax free – but that’s a red herring – all income is tax free if you are making a loss. 
• I don’t think Mills has avoided any tax, as gifts of wealth (cash or shares) are not taxable on the giver for the same reason – he has permanently relinquished all rights to future income from the shares or any proceeds on sale – exactly analogous with giving the party cash – no more interest, no more opportunity to buy something with it. 
• So yes, it may be tax efficient to Mills in the sense that he would indeed have had to earn income of c£3.2m to give £1.65m in cash (or had a capital gain of c£2m) but instead he has permanently foregone his property rights over accrued wealth of £1.65m. And we don’t know today what is the real cost to Mills of that.  In this sense efficient and avoidance are not the same thing.
• The only difference between this gift and cash wealth (post tax) is that he created this wealth by building a company – he is a wealth creator – in Tory terminology. If he had bought the shares and given them to the party there would be no issue. Somewhat ironically, the Tories are attacking Mills because he has donated wealth that he himself has created.

All a bit muddled? Let me put it this way instead:

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Case 1

Claire is a successful corporate lawyer. Recently Claire’s last surviving parent died and as an only child Claire inherited her parents estate.  The main asset was a house and – as it was valued at £350,000 – Claire received the house free of Inheritance Tax.  Since Claire was pretty wealthy in her own right and since she believed in social justice and wanted to protect the country’s public services she decided to give the house to the Labour Party.  She agreed with the Labour Party that it wouldn’t sell the house for 10 years but in the meantime would rent it out at affordable rents to key workers.  The labour Party would get the rent as an income for years before the house was sold.

The Daily Telegraph accused Claire of being a tax avoider (with Labour Party connivance) as she had given the party an asset that she hadn’t paid any tax on rather than using cash that she had accumulated from post-tax earnings.

Case 2

John is a successful businessman. The business he runs is privately owned and John owns the majority of the shares.  After the last valuation of the shares John realised that the shares were now worth a great deal of money. Because John believes in social justice and wants to defend the country’s public services he decided to give some of the shares to the Labour Party.  The Labour Party agreed that it wouldn’t sell the shares  – so as not to destabilise John’s company – until the whole company was sold or with the agreement of John.  In the meantime the Labour Party would get the dividend income from the shares as an income for the years before the shares were sold.

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The Daily Telegraph accused John of being a tax avoider (with Labour Party connivance) as he had given the party an asset that he hadn’t paid any tax on rather than using cash he had accumulated from post tax earnings.

Osborne and the Telegraph would never have complained about Case 1, although it’s effectively the same. The whole attack is politically motivated and vexatious, but you knew that already, right?