Sussex split creates Royal tax headache

The Duke and Duchess of Sussex’s shock decision to break with tradition, spend more time abroad and seek to pursue separate financial arrangements from other senior members of the Royal family looks set to raise a number of complex trans-Atlantic tax issues

Top of the list is the question of where the Royal couple will now be resident for tax purposes. Prince Harry might have to give up his UK residency or limit his time in Canada, or risk being double-taxed on any commercial income.

Canada requires anyone who spends 183 days or more in the country to pay income tax on their global earnings. Similar rules apply in the UK, but the limit is 90 days.

Meghan Markle is still a US citizen, and therefore required to pay US taxes on her worldwide income.  If the couple reside in the UK for a large enough portion of the year, which is counted as about six months, Markle 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 is not subject to double taxation.

Baby Archie is both a UK and a US citizen, courtesy of his parents. The Duchess would be able to claim him as a dependent on her US tax return, but if the Royal family has established accounts and investments in Archie's name, these would also need to be reported and could, potentially, be subject to taxation.

However, at the time of her wedding, the Duchess of Sussex indicated she intended to apply for British citizenship under Home Office rules.

This requires her to show she has not spent more than 270 days outside the UK during the three years before her application, or spent more than 90 days outside the UK in the last 12 months, according to government information. 

The Duchess’s decision to spend large amounts of time in Canada could, potentially, make becoming a UK citizen more challenging.

However, Home Office rules also indicate people may be exempt from the residency requirements if their partner works abroad either for the UK government or an organisation closely linked to government, which may apply to her circumstances.

Assuming the Duchess goes ahead with gaining UK citizenship, she could then elect to relinquish her US citizenship, and save herself the trouble and expense of filing US tax returns.

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.

Further complications surround the couple’s plans for a charitable foundation, which their newly launched website suggests could come into being from the new financial year starting in April.

While details are scarce, it appears this would be modelled on the sort of non-profit organisations run by Barack and Michelle Obama, Bill and Hilary Clinton and Bill and Melinda Gates.

However, if the Sussex’s foundation is registered in the UK, which seems likely as the couple have made applications for a number of UK trademarks, wealthy private Americans would not be able to enjoy the perk of claiming back US tax deductions on money ploughed into the venture.

One way of addressing this issue is to set up a US-based ‘friends of’ organisation to support the charity.

The Prince of Wales and the Duke and Duchess of Cambridge already have created such ‘friends of’ organisations for The Prince of Wales’s Charitable Foundation and The Royal Foundation of the Duke and Duchess of Cambridge.

This week sees the Queen hosting a top level summit at Sandringham, with Prince Charles, Prince Harry and Markle taking part in detailed discussions of how the Sussex’s new lifestyle will be organised and funded.

In a personal message on their website, the Duke and Duchess of Sussex said: ‘We now plan to balance our time between the United Kingdom and North America, continuing to honour our duty to The Queen, the Commonwealth, and our patronages.’

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