DAVID MILIBAND, the schools minister, and his brother Ed, the chancellor’s economic adviser, are set to avoid paying thousands of pounds in tax through an Inland Revenue loophole which the Labour party pledged to close.

The brothers, Labour’s rising stars, are poised to benefit after their family set up a scheme to share ownership of the family’s £1.3m townhouse in north London which was sold recently.

Accountants and the Inland Revenue say the scheme established by the Milibands is used to reduce inheritance tax.

The move is particularly controversial for Ed Miliband who is chairman of the council of economic advisers responsible for co-ordinating the Treasury’s long-term policy on behalf of Gordon Brown, the chancellor.

Brown recently launched a retrospective crackdown on the abuse of similar inheritance tax schemes which will hit tens of thousands of middle-class families from next year.

However, the scheme used by the Milibands has been excluded from the chancellor’s tough new laws. In 1994 Brown named 25 “tax abuses” — including the Miliband scheme — which he said Labour would stop if it was elected.

At the time Brown said that the very wealthy regarded inheritance tax as “voluntary”. Oliver Letwin, the shadow chancellor, said: “The real point about this episode is that it shows even Labour ministers sense that inheritance tax at the moment is unfair.

“This was supposed to be a tax on the rich but Gordon Brown has turned it into a tax on ordinary people.”

The Sunday Times has learnt that after Ralph Miliband, the Marxist father of David and Ed, died in 1994, he transferred almost all his assets, including homes in London and Oxfordshire, to his wife.

However, after taking professional advice, the family is understood to have posthumously rewritten his will to give 20% of the London home to both David and Ed.

David has declared a “20% share of family home in London” on the MPs’ register of interests since 2002.

This scheme is called a “deed of variation” and was highlighted by the chancellor in opposition as an unacceptable way in which the wealthy avoid paying death duties.

It allows people to inherit assets tax-free even if this goes against the wishes of the deceased. Had Ralph Miliband’s will not been altered, David and Ed would have inherited the house (or the money raised from its sale) when their mother Marion died and would have faced a tax bill equivalent to 40% of its value.

Instead they were able to cash in on their stakes when the family’s four-bedroom townhouse in Primrose Hill, north London, was sold earlier in the summer. When it was sold they may have paid other taxes.

The Milibands claim that the scheme was not established to reduce tax. However, leading accountants believe that such schemes always reduce inheritance tax bills. John Whiting, head of tax at Price Waterhouse Coopers, the accountancy firm, said: “The reason people use deeds of variation is to save inheritance tax. There has been speculation for years that this scheme would be closed and Labour identified it as an abuse, but it remains a legal tax-saving device.”

Yesterday a spokesman for the Treasury confirmed that the Milibands had used a deed of variation, saying: “There is no question of the Milibands avoiding inheritance tax and all taxes have been paid.”

A spokesman for David Miliband said that he had no comment.

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