Meghan Markle’s tax status puts Royal finances in view

Meghan Markle could be bringing more than a touch of Hollywood glamour to her new role as Duchess of Sussex, with reports that the former actress may also be adding to the Royal Family’s tax complications while she remains a US citizen

In order to stay in the UK, where she has set up house with Prince Harry in Kensington Palace, the Duchess has been granted leave to remain, an immigration status which means there is no limit to her time in the country.

Speaking about the duchess obtaining a visa, Kensington Palace said: ‘Ms. Markle has taken full legal advice on her right to remain in the UK and will be fully compliant with all requirements at all times. She will go through the normal visa process.

‘Ms. Markle intends to become a British citizen going through the normal process, which will take a number of years.’

In the meantime, Markle remains a US citizen subject to its tax laws. As Andrew Hubbard, tax consultant with RSM, points out, citizenship does not generally play a part in determining taxing rights, except in the US (and one other country – Eritrea).

‘US tax operates on a citizenship basis and so US citizens are within the US tax system wherever in the world they live and regardless of where their income arises.

‘There are a complex set of reliefs and exemptions which will often mean that no US tax is actually payable but all US citizens are required to complete a US tax return even if they have no US income,’ he pointed out.

Hubbard said: ‘The US has the political clout to enforce its citizenship policy. The Internal Revenue Service (IRS) has agents working throughout the world and many governments have concluded agreements with the US to assist enforcement of the policy.’

US tax guidance notes state ‘you are generally taxed on income available to you, regardless of whether it is in your possession.’

Potentially, that could mean distributions from Prince Harry’s £20m trust fund, could be liable for tax, as it is money which is ‘available’ to his wife. In addition to income from the fund, the Royal couple also receive allowances from the Queen and Prince Charles for their housekeeping and Royal duties. 

The US tax system does include a foreign earned income exclusion, which allows US citizens to exclude a certain amount of earnings while living in another country. In 2018 this limit was set at $104,100 (£81,250).

To qualify individuals need to pass one of two tests – either the physical presence requirement, which means spending 330 days of the year in a foreign country, or the bona fide residence test, which is where someone is a resident of a foreign country for a continuous period of time including one tax year.

There is also the foreign housing exclusion, which gives the taxpayer an additional deduction or credit for living expenses abroad, but does not include ‘expenses that are lavish or extravagant under the circumstances’.

If Prince Harry’s assets are in a foreign trust, Markle would have to fill out Form 3520 to disclose the gifts she receives from it. She would also have to report other gifts, such as jewellery, that she receives.

Markle would also be subject to the reporting requirements for Foreign Bank and Financial Accounts for accounts over which she has ownership or signatory authority. That means she would have to report accounts worth more than $10,000. Any foreign institutions that hold Markle's assets would also have to disclose that to the US government under the Foreign Account Tax Compliance Act (FATCA).

In view of the requirements, most financial commentators have suggested Markle is unlikely to combine bank accounts with her husband, which would risk the Royal Family’s financial arrangements being reported to the US tax authorities.

One option for Markle is to renounce US citizenship, a step also followed by MP Boris Johnson who found himself paying taxes on the sale of his London home as he was a US citizen at a time. There is currently a $2,350 fee for doing this.

Markle would also have to face the exit tax if she leaves the US permanently. This would treat all her assets - including stocks, bonds and property - as if they were sold on the day before the expatriation date and would impose levies on them based on their fair market value.

With a baby due in the spring, Markle and her advisors are likely to considering the tax implications carefully as if she retains her citizenship then any child would also potentially have US citizenship and tax responsibilities.

Hubbard noted: ‘But these things do not work in reverse. So if a future US President were to marry a British citizen who was tax resident in the US, HMRC officials could not go knocking at the door of the White House asking questions about family wealth. If they did I suspect that they might be reminded in no uncertain terms about the Boston tea party and the capacity of tax disputes to escalate into something much worse.’

Report by Pat Sweet

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