Princes William and Harry are facing an £8.4 million tax bill on the £21 million estate of their late mother, Princess Diana, after the Prince of Wales abandoned legal moves to try to save his sons from having to pay the inheritance tax.
The problem arose because Princess Diana received a £17 million settlement when she divorced Charles, but at the time of her death a year later had not drawn up a new will which would have taken account of her greatly-increased wealth.
The plan was for Charles, acting for the young princes, to make a so-called Barder application, under which he would have asked the court to allow him to reclaim the £17 million he paid the princess in a settlement when they divorced. That money would then have been put into a trust for William (15) and Harry (13).
But a spokeswoman for Prince Charles said there would 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," she said.
The former prime minister, Mr John Major, who is acting as legal guardian for William and Harry, was involved in discussions but has declined to comment.
The inheritance tax problem apparently arose because the princess failed to make a new will to take advantage of possible tax-efficient schemes after her divorce settlement last year. Before the £17 million settlement, which was invested and made £3 million in a year, Diana was worth £1 million. The total value of her estate was thus £21 million.
With inheritance tax at 40 per cent, the Exchequer could claim a total of £8.4 million for public funds.
Diana's financial legacy is further complicated by a legal battle over her "intellectual property", and an expected move by solicitors representing her estate, Mishcon de Reya, to seek compensation from companies exploiting her name by selling unauthorised memorabilia.
Buckingham Palace said yesterday there were "no short-term plans" to move members of the royal family out of Kensington Palace, Diana's former home, to create a "People's Palace" or public art gallery in her memory.