Meghan Markle will be able to navigate the tax scrutiny of Uncle Sam with careful planning, write Charlie Fowler and Daniel Simon
As well-informed US citizens know, liability to US tax is not determined by the place they call home. Instead, US citizens must file US tax returns irrespective of whether or not they live in the land of the free.
Uncle Sam has a long reach: a US citizen who has never even set foot in the US can be subject to US income tax on their worldwide income and gains.
As Meghan Markle is finding out, it’s not just the taxpayer who is subject to scrutiny. Guidance from the Internal Revenue Service to US citizens living abroad states that they are taxable on all income “available” to them, which in Meghan’s case may include the £300,000 of income that Harry reportedly receives from his trust fund each year.
Queen Elizabeth and Prince Charles – who provide support to Meghan and Harry – might be in the spotlight too. Similarly, the market value of loans or gifts to Meghan could also be reportable, for example loans of jewellery for non-state occasions.
However, the Queen is giving Uncle Sam a run for his money. A UK person living long term in the US might have though that they were outside the reach of Her Majesty’s Revenue & Customs. Not so: unless they have done enough to abandon their UK domicile of origin (often a much more difficult task than one might think) that person could find their worldwide estate still within the scope of UK inheritance tax (IHT) when they die.
Whereas the US estate tax exemption is generous (doubly so, thanks to the present occupant of the Oval Office) at a sizeable $11.2m per taxpayer, the IHT exemption in the UK is a more meagre £325,000, with the excess taxed at 40 per cent.
Happily, sensible planning can ease the tax burden for those on either side of the Atlantic.
For a UK person dying in America, protection under the US/UK estate and gift tax convention can avoid the spectre of double taxation, with the tax credit provided under the convention, broadly meaning that tax is only paid in the country with which they are most closely connected. Careful will planning can also ensure that, where the taxpayer is married, tax can be deferred until the second death.
Similar opportunities are available to Meghan. Since Harry is not a US citizen, US estate tax could be payable if he inherits Meghan’s estate. However, by including a tax-efficient US trust in her will, Meghan can ensure that any tax charge will be deferred until Harry’s death, or until he takes funds out of the trust.
Meghan might also consider creating an ‘excluded property trust’ in her lifetime for the benefit of the next royal baby. Once she has been resident in the UK for 15 years, she will become deemed UK-domiciled and her worldwide estate will be within the scope of IHT. However, by creating an excluded property trust now, Meghan can (without incurring US tax) shield up to $11.2m of non-UK assets from IHT on her death – a UK saving of $4.48m.
Meghan might therefore sleep more easily in her cottage on the Windsor estate. Although Uncle Sam will be scrutinising her (and her new family’s) tax affairs with a keen eye, with careful planning she can limit the effect on the royal purse.
By Charlie Fowler, Associate in the Tax and Estate Planning Team, and Daniel Simon, Senior Partner, at Collyer Bristow LLP
Image: Mark Jones/ Flickr