Rising bills, problems with her children and the demands of the taxman: how the Queen became strapped for cash

How can it be that the Queen is, to put it rather bluntly, a little cash-strapped?

How can it be that the Queen is, to put it rather bluntly, a little cash-strapped?

One of the most remarkable answers to this question is that we have been here before. And not all that long ago.

In 1969, it was the Duke of Edinburgh (who else?) with typical off-the-cuff candour, who first suggested publicly that the Royal Family might not be financially secure.

In an interview with the US broadcaster NBC, he said: "We are in the red" and went on to tell the audience of journalists: "We might have to move out of our house next year."

His comments led to a flurry of activity at the Buckingham Palace press office where it was argued that an attempt should be made to have the remarks struck from the public record.

But the damage had been done. In one unguarded moment, Prince Philip betrayed the truth about the running antagonism between the Royal Family and the Wilson government over the funding of the Windsors during the late 1960s.

The Royal Family was pressing the Government for more money because the value of the public contribution to the monarchy had been dangerously eroded by a steady rise in inflation. Historians came to refer to it as the "Civil List crisis".

Could history be about to repeat itself, 30-odd years later?

Two years ago, another Labour government decided to freeze the Civil List at £7.9m so the Queen would receive the same fixed amount until 2011. That meant the Civil List, and the £359,000 parliamentary annuity paid to Prince Philip, would be kept for 20 years at the rates set in 1990. But it only takes a modest rise in inflation or a Palace disaster to exhaust the reserves and bring the Queen back to Parliament with her begging bowl. The political and constitutional implications are far-reaching and may give MPs a chance to finish the business that Harold Wilson started in the 1960s.

To allow the Queen to dig into her private wealth to supplement her public spending and so delay an emergency debate in Parliament is unthinkable, her advisers say.

The Palace maintains that the Queen's public and private wealth must be kept separate. Her advisers also know her private accounts are not as rosy as they were in the early 1990s when the Queen agreed to pay income tax and repay the annuities given by Parliament to the other royals. The exceptions were the Queen Mother and Prince Philip who directly benefited from state funds.

The Independent has discovered the annual costs to the Queen's private wealth have increased by £15m in the past 10 years. How much this is threatening her independent wealth is not known. The Palace refuses to disclose any new details about her private income except to say her personal wealth, that which she can truly call her own, falls far short of the figures suggested by those who have speculated on this subject in the past – less than £100m. Financial experts argue the rest of her wealth is hidden in trust funds for her grandchildren. Even if this is the case, and the Palace will not comment on such a suggestion, trust funds are protected by strict rules that prevent their investments being plundered.

If one takes the Palace's position at face value, the Queen's financial security depends on the combined risks of inflation, fluctuating equities and money markets, and the taxman.

The fragile state of these finances were placed under greater strain after the divorces of the Prince of Wales and the Duke of York. Prince Charles, who has less than £5m cash and very few personal assets, had to fall back on the Queen's available income to settle his £17m divorce settlement with the Princess of Wales.

There is evidence – significant activity in her funds held in the name of the Bank of England Nominees – to show that coming up with the required amount of money caused the Queen to sell off part of her share portfolio. Similarly, she had to pay a lesser figure to help Prince Andrew settle his divorce from Sarah Ferguson.

Such high levels of investment activity to cover relatively small amounts of capital supports the idea the Queen does not have ready access to stockpiles of cash. Analysts have never been able to reliably identify more than £20m.

Selling important works of art or gifts, which she can claim to call her own, present political, public relations and diplomatic problems. For example, Palace insiders say that the sale of her stamp collection, although worth millions of pounds, would immediately lead to questions about the Queen's financial solvency. Even the Duchy of Lancaster, the Queen's ancient 54,000 acre private estate from which she draws to finance her private spending, is not hers to buy and sell. While she is entitled to the profits, the sovereign is not allowed to touch the capital.

The truth about the finances is murky and some say deliberately complicated by Palace obfuscation. Phillip Hall, the foremost authority on the Queen's fortune outside the Palace, claims only the Queen and Prince Philip know the true state of the royal finances.

Mr Hall, author of Royal Fortune: Tax, Money and the Monarchy, says the time has come for light to be shone on the tax arrangements between the Queen, the Inland Revenue and governments.

He said: "We are entitled to know what subsidies the Queen has been granted over the years. The Palace argues that because she is now taxed as a private individual she has the right to privacy. If that is the case, then why can't they tell us about the previous tax exemptions that she was granted when she wasn't taxed like an ordinary citizen."

Professor Vernon Bogdanor, professor of government at Oxford University, argues that there is always a danger of unseen constitutional crisis. "The finances and the Privy Purse are very obscure and it's sometimes impossible to say whether something should be paid for by public or private funds. There is a great danger if the Queen's finances becomes so whittled down that she can't perform her constitutional functions so that she becomes a pure cipher."

He said the situation should be clarified so that the public understands the difference between the kinds of wealth owned by the Queen.

The Palace argues that the public money paid to the Queen as head of state is the most closely audited of any organisation in the world. But it rebuts suggestions that the Royal Family's private wealth should be subjected to a similar degree of scrutiny.

Sir Michael Peat, Keeper of the Queen's Privy Purse, who acts as the Queen's financial director, has said that that no one expects the Prime Minister to disclose personal financial details and the same right should be afforded to the Queen.

But constitutional experts argue that we have a right to know whether our own monarchy is teetering on the edge of a financial crisis.

Back in 1969, the prime minister's records of the day show Whitehall had drawn up a secret plan for a Scandinavian-style monarchy to put an end to centuries of arguments over how much money parliament should give to the monarch. The record shows Prince Philip was right to have been worried. One part of the plan did indeed include proposals for the Queen and her immediate family to move out of Buckingham Palace into a private home, financed entirely from her own private means.

Prince Philip's comments forced Wilson to come clean and, a few weeks later, he admitted to the Commons that the Royal Family had been in the red since 1962 and that the Civil List reserves would be exhausted by the end of 1970.

The Palace maintains that the Queen has very little private money, all of which is fully committed. While the Palace refuses to throw open her private accounts, we may never know how close we have come to a second Civil List crisis.

Pressure points: Where the Queen's finances have been stretched

The Edward case

The decision by the Earl and Countess of Wessex to retire from business life this year confirmed the inherent antagonisms of the public and private interests of the Royal Family. It also left the Queen with a financial headache: how to cover the lost private incomes from Edward's television company and Sophie's PR career? By giving up their day jobs, the couple forfeited combined salaries of about £150,000.

Edward already receives £141,000 from his parliamentary annuity, which the Queen repays to Parliament, but the Queen has also supplemented it with additional hand-outs.

The cost to the royal purse of funding their lifestyle is estimated to be £500,000 a year. A sizeable proportion goes on the upkeep of the couple's Surrey mansion, Bagshot Park, above, which costs an estimated £250,000 a year. Set in 88 acres of woodland in the Surrey stockbroker belt, the £10m property is the largest home owned by any of the Queen's children and three times larger than Highgrove.

The final terms for the couple's retirement from business life were only settled after strained negotiations involving senior Buckingham Palace officials. When he was unhappy with any of the financial terms of the settlement, Edward raised his concerns to his father, who is said to take a more generous view.

Income tax

The Queen agreed to pay income tax in 1993 but the terms of the deal she struck with the prime minister, John Major, remain secret. The voluntary nature of the agreement means it did not become law. All we know is she pays tax on the income from the Privy Purse, the profits which she receives from her estates run by the Duchy of Lancaster, and on the dividends from her private share and investment portfolio. The Inland Revenue has a special team assigned to assessing the Queen's tax returns but will not discuss anything about them. The Palace says she pays tax, like any other citizen in the top-income bracket, at 40 per cent. But the most shadowy part of the Queen's finances is her personal fortune. Tax on the Privy Purse income she receives from the Duchy of Lancaster is believed to be about £3m and tax on the dividends of her £100m investments and assets could be as much as £4m. Aside from an anonymous tax official in Cardiff, it's anyone's guess how much the bill really is. What we do know is that the Queen is exempt from inheritance tax. It was this exemption that has allowed her to escape an estimated £20m tax bill on her mother's estate. The big savings to the Royal Family will come when the Queen's wealth is passed to her heir. Without the inheritance tax exemption, Prince Charles would have to pay more than £400m when he inherits the Queen's fortune.

The Queen's bills

The Queen's bills are up £15.15m a year since 1992. She pays an estimated £7m in tax.

The parliamentary annuities: In 1993, the Queen agreed to pay back the parliamentary annuities to the state. Total: £1.5m

Family financial support: The money the royals received from their annuities was only ever supplementary to additional hand-outs from the Queen. But some royals are also thought to benefit from further support. Total: £1.5m

The Windsor Castle fire: Much of the £40m bill for the restoration work was met by ticket sales from Buckingham Palace. But the fear of another palace going up in flames has led to preventative and safety work in many palaces. Total: £2m

Staff: In 2000, when the Palace compared Royal Household wages with market rates, one in five of its staff were below the national average. Last year, wages were upgraded. Total: £400,000

Private homes: Balmoral tourist trade from the US dried up after after 11 September. Sandringham has been badly ravaged by the foot-and-mouth crisis. Total: £500,000.

The Queen's horses: Upkeep of her horses. Total: £250,000

The Jubilee: The bulk of the expense will be met by the Queen Golden Jubilee Weekend Trust but the Queen is expected to pay for private celebrations. Total: £1m.

The Queen Mother's estate

The vast wealth that the Queen Mother bequeathed to her daughter upon her death will do little to help boost the cash flow at the Palace.

It is an irony that while the Queen Mother's paintings and jewellery are estimated to be worth £50m nearly all of it is considered part of the national heritage to be held in trust and sometimes displayed in public for the nation. It is not for sale.

Of much more concern for the Queen's accountants is the direct financial cost of the Queen Mother's death. The most immediate liability facing the Queen is her mother's reputed £4m overdraft, arranged at her bank Coutts & Co. The Queen Mother enjoyed an extravagant lifestyle, often living beyond her means. She once remarked at a dinner party: "Golly, I could do with £100,000, couldn't you? Had such an awful afternoon today with my bank manager, scolding me about my overdraft."

But it is the end of the £643,000 parliamentary annuity, paid monthly to maintain the Queen Mother's household and ended on the day she died, that will leave the Queen without £6.4m over the next 10 years. While the Queen will no longer have to indemnify her mother's private entertaining she has agreed to continue to employ all those staff who wish to remain with the Royal Household.

The Royal Collection

The Royal Collection, established by the Queen nine years ago, can hold claim to house the finest and most valuable works of art in the country. Paintings by Canaletto and drawings by Raphael and Leonardo, and the art of Reynolds and Gainsborough, are on view in a number of the Queen's palaces.

But since 1996, profits for the palaces ­ and the exhibitions ­ have fallen from £8m in 1996 to £4m in 2002. Direct costs have risen from £4.3m in 1996 to £7.6m.

Such disappointing figures prompted Prince Charles, chairman of the Royal Collection Trust, to comment last year: "No one could have predicted the dire effects of the foot-and-mouth epidemic on tourism, and the drop in visitor numbers across the whole country has been drastic. This will have an immediate short-term effect on the trust's income."

The Royal Collection's director, Hugh Roberts, gives a much fuller account. He explains that the enterprise arm of the collection has met increasing competition from a "number of high-profile Lottery-funded projects." And he warns: "Looking ahead, it is more than likely that the royal residences open to the public will see further reductions in visitor numbers."

The Palace says the Royal Collection, a trust that looks after the Queen's art and receives income generated by visitors, is still profitable and the only collection of major national importance to receive no government funding or subsidy.

Sources: Buckingham Palace. The Association of Chartered Certified Accountants. Accountants Ernst & Young. National Audit Office. Accounts of the Duchy of Lancaster from 1990 to 2001. Report of the Trustees of the Royal Collection 2001. Report of the Royal Trustees 2000. Phillip Hall, author of 'Royal Fortune: Tax, Money and the Monarchy'.