Developer's tower block approved after £200,000 donation to Labour

Loans to political parties from tax exiles are to be banned under new rules to be laid out by Sam Younger, the chairman of the Electoral Commission.

A loophole in anti-sleaze legislation has allowed the parties to take money from offshore funds but that will be stopped from next week. None of the parties was prepared to say whether it took offshore loans but at least one Labourlender, Chai Patel, who loaned the party £1.5m is known to have most of his personal fortune in the tax haven of Jersey.

John Prescott, the Deputy Prime Minister, is facing suggestions that there could have been a link between a £200,000 donation to Labour by Sir David Garrard, former head of the Minerva group, and the company's planning application for an office block called Minerva Tower. English Heritage claimed it would ruin views of the Tower of London, but Mr Prescott refused to call in the application for review after it was approved by the Corporation of London. The charge was dismissed by his officials, who said his refusal to intervene was "based on the merits of the case".

Offshore donations were banned by Labour in the Political Parties and Referendums Act 2000 after The Independent disclosed that the Tories had set up offshore funds. There were also claims they received cash from foreign backers.

The law failed to ban offshore loans but Electoral Commission sources said last night that the loophole will be closed in the voluntary code to be published on Wednesday pending legislation. It would still allow lenders who are taxed abroad to give soft loans to parties, but only if they are on the UK electoral register. Nigel Morris, former head of Capital One Financial Corporation, one of the Labour Party's £1m lenders, is believed to be based in America for tax purposes, but is still on the UK electoral register.

Senior Tories claimed that, although Labour named 12 millionaire lenders including Dr Patel and Mr Morris, the party has not fully disclosed whether it received loans from offshore companies. However, the ban on offshore loans increased the pressure on Tory leaders to name their all their lenders, and say whether any are tax exiles. A spokesman for David Cameron, the Conservative leader, said he would not bow to the pressure by Labour to name those who gave soft loans to the Tories before the last election.

In an interview on GMTV to be screened tomorrow, Liam Fox, the former Tory chairman, said the Tories would in future name their lenders under the new rules but he added: "When people have given loans on the basis of confidentiality, I don't think we can apply those rules retrospectively." He also refused to give a guarantee that the Tories had not taken loans from lenders based abroad for tax purposes. "As far as I am aware we haven't," he said.

The Tory spokesman claimed Tory business lenders were afraid of being victimised by the Government. "Some are completely relaxed about being named, but others who have work with the Government fear reprisals from malicious ministers," he said.

The Cabinet agreed on Thursday to turn the heat onto the Tories next week. This weekend Labour will urge all Labour MPs to challenge the Tories on the loans they have received in the past. Jonathan Marland, the Tory treasurer, said he was not prepared "under any circumstances, to disclose where the loans come from". John Hutton, the Work and Pensions secretary, said: "What have the Tories got to hide?"

The Tories paved the way yesterday for the sale of their Smith Square headquarters. The sale could raise an estimated £30m. The party paid £15m with a commercial bank loan for the freehold of the building with an adjoining office at 67 Tufton Street used by civil servants.

Labour this week said it was selling its own headquarters for £6m but will gain only £500,000 to pay off loans which could exceed £20m. Labour's lenders are being asked to convert their loans into gifts, but that has been refused by some supporters including Rod Aldridge, who resigned as head of Capita in the furore over his £1m loan to Labour.

The story so far

* Four millionaires nominated by Tony Blair for peerages gave loans to the Labour Party: Chai Patel, the head of the Priory rehab clinics (£1.5m); Sir David Garrard, a property developer with Minerva (£2.3m); Barry Townsley, a stockbroker (£1m) and Sir Gulam Noon (£250,000).

* Lord Levy, Labour's high value fundraiser, dubbed Lord Cashpoint, told some donors to pay their donations as loans. This would avoid Labour having to declare their names.

* Eight other millionaires joined the Labour loan club before the last election: Lord Sainsbury, a minister, (£2m); Richard Caring, rag trade millionaire and owner of The Ivy restaurant (£2m); Rod Aldridge, head of Capita (£1m); Nigel Morris, co-founder of Capital One Financial Corporation (£1m); Andrew Rosenfeld, partner with Sir David Garrard in Minerva (£1m); Sir Christopher Evans, venture capitalist (£1m); Gordon Crawford, software entrepreneur £500,000; Derek Tullett founder of financial wholesale brokers (£400,000).

* Only Tony Blair, Lord Levy and the former party general secretary Matt Carter knew of the loans.

* Labour's treasurer, Jack Dromey, was furious and demanded full exposure. His wife, minister Harriet Harman, disappeared from the BBC Question Time line-up on Thursday night.

* Mr Blair announced a shake-up of the anti-sleaze rules, including proposals to name all lenders and an end to his role in nominating people for honours such as knighthoods. He will keep the power to nominate working peers.

* Labour, in financial crisis, wants the lenders to convert their loans into gifts. Labour's national executive agreed to sell party headquarters for £6m.

* Electoral Commission chairman Sam Younger asked the parties to name all their lenders. The Tories refused to do so.

* Mr Blair has appointed Sir John Bourne, head of the National Audit Office, to advise ministers on their code of conduct.

* Electoral Commission is drawing up draft code of new rules for disclosure of loans next week.