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You would most likely have to had to have been sleeping under a rock these past weeks to have not heard about the latest Royal crisis, and for some reason we don’t mean Andrew! Is there something to be said that American women prove far too much of a distraction to our Royal men, harping back to the days of Wallis Simpson and Edward VIII?
In case you are a rock dweller, the Duke and Duchess of Sussex (Harry and Meghan) have decided that they no longer wish to be considered ‘senior’ Royals and want to make their own way in life.
This is a situation perhaps coined unfairly as ‘Megh-Xit’ by the media for the seemingly infinite constitutional and legal considerations that are under scrutiny by virtue of their proposed next step in life.
I don’t wish to disappoint readers, but we thought we would outline the tax implications arising from this situation. (This is a tax blog in case you hadn’t noticed.)
The ‘Facts’ – Harry & Meghan – International Tax
From a quick scour of some of the more reliable (!) news sources on the current state of play, we have been able to identify a number of factors which will impact on the couple’s tax position: –
Canada here we come – Canadian Tax & UK Tax
Canada, the filming location for the hit US TV show Suits which propelled Meghan to stardom, is where we are told that the couple will spend most of their time. The couple already own a vast mansion on Vancouver Island, which they plan to use as their main home.
The future of Frogmore Cottage, which sits within the grounds of Windsor Castle and was granted to the couple following their marriage, remains an open question, but it seems likely that this will remain available for their private use. However, it is quite possible that they will be required to pay commercial rent if they do not use the property as their main residence, a bill that could run into the £millions.
Canada has their own version of the Statutory Resident Test , which does have some similarities to the UK, but seems simpler in its application (surprise surprise).
Very broadly, Canada will treat a taxpayer as tax resident if: –
In such a case, Canada will subject a taxpayer to tax on their global earnings and capital gains.
But depending on how much time the couple (either together or individually) plan on spending in the UK, it may be the case that they satisfy the requirements of the Statutory Residency Test and are thereby classed as UK tax residents also. Let’s not forget that Frogmore House is staying and gives them at least 1 all-important UK tie. (Of course, though, if the couple plan to spend any great time in the US throughout the course of a year, Harry would also need to consider the impact of the US residency test to boot.)
Therefore, the couple may find themselves being taxed in both Canada and the UK on the same income. Let’s hope they are up to speed with the Double Taxation Treaty between the UK and Canada and the principles of Foreign Tax Credit Relief then!
Harry’s Taxing Position
The Crown has a legal tax-exempt status because certain acts of Parliament do not apply to it. Crown bodies such as The Duchy of Cornwall are not subject to legislation concerning income tax, capital gains tax or inheritance tax. Furthermore, the Duchy of Cornwall has a Crown exemption and the Prince of Wales is not legally liable to pay income tax on Duchy revenues, although he does make voluntary payments to HMRC.
By stepping down as a senior Royal, Harry’s current UK beneficial tax-free status may change, and Canada does not grant the same privileges in any event. Therefore, any income that Harry is anticipating on earning in his quest to achieve financial independence is likely to fall within the net of both UK and Canadian tax.
Perhaps the ‘hidden’ consideration though, the couple have a joint net wealth of c.£32m. More on Meghan below, but it is likely that Harry will maintain his status as UK domiciled for tax purposes. That could result in a fairly hefty UK inheritance tax bill alone!
Similar to the position in the UK, Canadian tax residents are also not subject to tax on receipts of cash gifts. Therefore, if he is to continue to receive his ‘pocket money’ from his Father, Harry may not have any tax considerations there.
However, if there could be some ‘connection’ made between his Father continuing to provide him with allowance that is in some way linked to his continuing to undertake some ‘light’ Royal duties that he may be required to take on, might it be argued that this could represent employment income in both Canada and the UK and be subject to income tax accordingly?
Meghan’s Taxing Position
Meghan is a US citizen, and is therefore a complicated being… for tax purposes.
As a US citizen, Meghan is already required to pay tax in the US on her global income and estate, regardless of where she lives. Whether she intends to seek UK citizenship at some point is unclear, but it is unlikely she will be able to if they plan to not spend a great amount of time in the UK.
If she resides in the UK for a large enough portion of the year (over six months, about), Meghan will be able to apply a Foreign Earned Income Exclusion to her US taxes. It would allow her to deduct the income tax she’s already paid in the UK, essentially ensuring that she’s subject to Double Taxation. The same goes for Canada.
Interestingly, it appears that just days before the couple announced their intention to step back from Royal duties, the company that owns Meghan’s lifestyle blog incorporated in Delaware, according to state documents. Frim Fram Inc. — which ran Meghan’s defunct website “The Tig” — transferred out of California and registered as a new corporation in Delaware on New Year’s Eve 2019.
In Delaware, companies are not required to reveal the names of their owners — an enticing reason for many to incorporate there. It is common for a company to hire a lawyer or an agent to sign as the authorised person, which allows owners’ identities to remain secret. Further, and perhaps the driving force behind the move, State taxation in Delaware is lower than California.
Might seem a bit odd to incorporate on New Year’s Eve, but had this been undertaken just one day later, for at least some of 2020 the corporation would have been subject to the higher Californian tax. It is believed that Meghan could make £millions from social media, branding, endorsements and sponsorship alone.
Perhaps by ‘staying in’ on New Year’s Eve she’s managed to pull off quite a tax coup?
What about Archie?
And we can’t forget little Archie. He is a UK citizen, but he’s also a US citizen—even if his parents never registered him as such or obtained a social security number and passport for him. On her US tax return, Meghan, would have to claim him as a dependent. As such, Meghan herself would need to report any passive income he may receive though established accounts or portfolios in his name on her US tax return.
Maybe that possible gift of £50 of premium bonds from his Great-Grandmother needs to be revisited?
Conclusion – International Tax Advice
If Harry and Meghan are reading this, we would just like to take a moment to point out that as a firm of UK tax advisors with particular interests and specialism in international taxation matters, we’d be more than happy to provide you with a second opinion on your potential tax exposure, as well as any plans which may be followed to dampen the impact of the future burden.
However, you don’t need to be Royalty to benefit from our advice. If any of this article rings true with your current situation, or that of your clients, please do get in touch.