28 Jan How will US expat tax regulations affect Prince Harry and Meghan Markle following their split from the Royals?

Of all the headlines we expected to see at the start of 2020, the Duke and Duchess of Sussex’s decision to break with the Royal family wasn’t one. The shock announcement that the couple intend to step down from Royal duties has stirred the media, many of whom have already dubbed the decision ‘Megxit’. But what does it mean for their taxes?

As Harry and Meghan have decided to spend more time in other countries, such as Canada, and have stated that they want to have separate finances, it’s likely that there will be a number of complex tax issues. Not least because Meghan Markle is a US expat currently living in the UK and planning to spend an unspecified amount of time living in Canada.

US expat tax issues even more complex for Meghan and Harry

The biggest question is where the Sussex’s will be considered resident for tax purposes. For example, Harry is obviously a British citizen but depending on how long the couple plan to live in Canada each year, may be subject to double-taxation on money made from commercial ventures.

He could, of course, give up his UK residency, but it’s more likely they will choose to limit the number of days they spend in Canada. The tax rules for the country state that anyone spending 183 days or more in Canada must pay income tax on their global earnings. It’s the same over here, but the UK’s limit is 90 days.

Meghan Markle, on the other hand, remains a US citizen. And, as with all US citizens living abroad, she is obliged to pay federal taxes to the Inland Revenue Service (IRS) on her global income. The US tax system is notoriously complicated, and the Government has a long reach when it comes to taxing its citizens, no matter where they live and work.

Meghan Markle may be eligible for FEIE

If the couple live in the UK for long enough every year (around six months), under the dual agreement between the countries, the Duchess of Sussex will be able to take advantage of the Foreign Earned Income Exclusion (FEIE) against her US tax.

FEIE would mean she can deduct income tax she has already paid on her global income in the UK. It’s in place to attempt to stop US citizens and greencard holders being double taxed.

Of course, there’s also their child to consider. Archie is both a US and a UK citizen, which means the Duchess could claim him on her US tax return as a dependent. However, if the Royal family has already set up investments and accounts in his name, which is very likely the case, these must be reported to the IRS and will be subject to tax.

When the couple married, the Duchess hinted that she would be applying for British citizenship, under the established rules from the Home Office. To do this, she must be able to prove that she hasn’t spent more than 270 days not in the UK for the three years before she applies. She must also prove that she hasn’t been out of the UK for more than 90 days during the previous 12 months. Therefore, given the couple’s announcement that they intend to spend a lot of time in Canada, it will be more difficult to become a UK citizen.

There are exemptions under the Home Office rules, however. If their partner is working abroad for the UK Government or a listed organisation with links to the Government, then that person could be exempt from these requirements for UK residence.

UK or US citizenship for Meghan Markle?

Should the Duchess obtain UK citizenship, her next move could be to renounce her US citizenship. While this would indeed mean she won’t need to file US tax returns anymore, it’s not as simple as filling in a form and walking away. The IRS has various rules in place to stop people renouncing their citizenship to avoid taxes, including demanding substantial amounts of money to do so.

This ‘exit tax’ is raised on all of her global assets, including property, bonds, stocks, savings, pensions and income. They’re valued as if they are sold on the day before the date chosen for renunciation of citizenship, and the tax is imposed on them based on an estimated market value.

As the Duke and Duchess have also announced plans to launch a charitable foundation in April this year, further taxation complications could ensue. Details are still limited on what the charity will comprise, but it’s likely to be similar to the foundations run by Bill and Hilary Clinton and Barack and Michelle Obama.

Charitable foundation leads to tax complications

If the charitable foundation is registered here in the UK, then the couple won’t be able to claim back tax deductions on money spent on the venture as they would in the US. And while it’s not yet been announced where the charitable foundation will be registered, it appears likely that it will be in the UK. The couple have already applied for a number of UK trademarks which lend credence to the suggestion it will be run from the UK.

To address this, they could set up a ‘friends of’ organisation in the US to specifically support the charity. If the couple choose to do this, they would be following the example of Prince Charles and the Duke and Duchess of Cambridge, who have already created a similar organisation in the US for The Prince of Wales Charitable Foundation and The Royal Foundation of the Duke and Duchess of Cambridge.

The sheer complexity of the tax challenges facing the Duke and Duchess of Sussex are noteworthy for US expats. Their situation highlights the difficulties in ensuring tax compliance when familial backgrounds are not straight forward. And while the couple will undoubtedly have access to the finest advice, many US expats do not. It’s essential to find out exactly what your tax obligations are as a US expat living in the UK, no matter your income level or circumstances. Get in touch with the expert team at Ingleton Partners if you need help with your taxes as a US expat.