Prince Harry and Meghan Markle have been living in a whirlwind the past year, from welcoming their first child, Archie, to starting their transition from their positions in the royal family. With their plans to stop accepting funding from the UK Sovereign Grant and to move part-time to North America including Canada and the U.S., most likely California, there will be hurdles for them - one of which being taxation. Being royal makes it much more complicated, but we can try to do some analysis under some simplified assumptions.
Even though the family will be splitting their time between the UK and North America, Meghan and Archie must pay U.S. income taxes on their worldwide income because they are both U.S. citizens. Meghan has had to handle the logistics of paying her U.S. taxes while living in another country for a while now but could see additional complications. Depending on the role Meghan takes on in Canada and the U.S., she will need to deal with U.S. income tax (federal and likely state of California) and self-employment tax because of increases to her self-employment income, which require estimated payments on a quarterly basis.
Besides potential disclosures of certain foreign financial assets on their U.S. income tax returns, she and Archie may also have Foreign Bank and Financial Accounts (FBAR) reporting filing requirements if they have a financial interest in or signature or other authority over one or more foreign financial accounts and the aggregate value of those foreign financial accounts exceeded $10,000 at any time during the calendar year reported. Furthermore, both Meghan and Archie may have U.S. gift tax reporting requirements if they receive large gifts from the Queen and the royal family. There are severe penalties for non-filing or late filing.
For Harry, who is not a U.S. citizen, it is also not simple although he likely has more flexibility. He may also be required to file a U.S. income tax return and pay U.S. federal and state income taxes on certain income generated from U.S. sources, or on his worldwide income if he becomes a U.S. tax resident, determined under some complicated rules. As a U.S. tax resident, he would be subject to similar issues Meghan and Archie face. Thus, it will be important for Harry to keep a log of their travels, as even being in the U.S. for a short airport layover could be counted as one day in the U.S. in determining his U.S. tax resident status.
Because of their unique identities and status, they may have similar tax reporting requirements in UK and Canada. Since the U.S., UK and Canada all have a tax treaty with each other that prevents double taxation of the same income in two or more countries, they could receive some tax relief by claiming a credit in one country for foreign taxes paid to the other countries. However, navigating the complicatied rules of tax treaties and determining which income should be taxed in which country could be a challenging task.
To avoid some of the complicated U.S. tax rules, Meghan could consider relinquishing her U.S. citizenship after obtaining her British citizenship. However, there are large tax effects that may be imposed on someone giving up their citizenship, especially for someone like Meghan with significant net worth. As the U.S. government’s final taxation of ex-patriots, they are subject to an “exit tax,” determined under some complicated rules. Even if Meghan gives up her U.S. citizenship, Archie may not renounce his citizenship until he is 18-years old, and neither Meghan nor Harry may renounce it for him.
As members of the royal family, they should have competent financial and tax advisors to help guide them through this transition and their complicated situations. For the rest of us, although you may not be royalty, you may have some complicated international tax issues. If you need assistance navigating through international taxation, or any other tax-related matters, contact The Tax Warriors® at Drucker & Scaccetti.