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  1. Wealth
May 7, 2019updated 31 May 2019 8:35am

Tax planning for the royal baby – expert opinion

By Spear's

The arrival of an American royal is going to introduce a new level of complexity to the Royal accounts – at least for the next 18 years, writes Matthew Pannell 

Despite a 1,200-year lineage the much-anticipated arrival of Prince Harry and Meghan Markle’s baby will represent a first for the Royal Family. The new Prince or Princess will be the only Royal in British history to be born with American citizenship.

This will no doubt highlight some interesting contrasts between British and American life. Will the new baby be dressed in nappies or diapers? Will it have a dummy or a pacifier? Attend nursery or kindergarten?

For the Royal Family these contrasts will be more than trivial linguistic matters but will spread into the more serious world of personal finance. From a tax perspective the Royals will need to ask themselves, ‘will the baby be UK or US resident?’ The answer to this last question will be ‘both’.

American citizens are subject to US taxation as residents of the US irrespective of where they physically reside. American citizenship is relatively easy to acquire. The Royal baby will inherit US citizenship from their mother given the Duchess is already American and has been US resident for the required five years, two of which being after the Duchess reached the age of 14.

The baby’s US citizenship will apply from birth, irrespective of whether the child is ever present in the US or whether the Duke and Duchess exercise their right to acquire a US passport for the little one.

From a UK perspective, the child will inherit a UK domicile from Prince Harry. So long as the new Prince or Princess remains physically resident in the UK, the UK will also impose taxation on the child’s worldwide income and gains.

The potential for double taxation is very real. Every year almost 200,000 Americans resident in the UK must grapple with the difficulties and interactions of the double taxation, but when the complexities of the Royal finances are introduced the issues will be even more difficult.

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It is a well-known fact that much of the Royal estate is held in trust. The Spencer family, having significant wealth of their own, would also be expected to have made provisions for future generations through the use of such vehicles. The new Royal will almost certainly become a beneficiary of these trusts from birth. The US tax regime reflects an innate scepticism of all things foreign.

Foreign trusts, companies and investments are all subject to certain ‘anti-avoidance’ provisions designed to prevent such structures being used for abusive purposes. Often these regimes result in punitive taxation rates on income derived from the structures irrespective of whether they were created for legitimate purposes.

Even where the tax consequences can be managed significant reporting obligations will arise. The new Prince or Princess is likely to be filing an annual US tax return many hundreds of pages long – possibly thousands.

Disclosure of beneficial interests in foreign trusts, companies, investments and bank accounts will be needed. Complex attribution rules may deem the little-one to own investments or assets that may in fact end up benefiting other, non-American royals.

Receipts of gifts will also need to be disclosed – no doubt there’ll be plenty of those following the birth including some potentially priceless family heirlooms. Even absent any tax liability significant penalties can apply simply due to a failure to report – often calculated based on a fixed percentage of the entity’s value.  Any errors or omissions could therefore be extremely costly.

Often US domestic structures will attract more favourable treatment including fewer disclosure obligations, but this will provide little help for the Royals whose trust structures will have been in place long before any American lineage was anticipated, and which could not be modified easily.

In any case, the UK operates its own anti-avoidance regimes to non-UK structures, including those established in the US, leaving the American in the UK between a rock and a hard place.

No doubt the new Royal will be under some pressure from advisors to expatriate or ‘relinquish’ American citizenship. This is a complex process and isn’t feasible before age 18 in any case.

For many wealthy Americans expatriation carries its own tax burden with a ‘mark to market’ exit tax assessed on all assets owned by – or attributed to – the taxpayer on the date of expatriation.

Some respite will be available for the new Royal. For certain dual citizens, such as the new Prince or Princess, an exemption from the exit tax will be available so long as they maintain a tax home in the UK as at the renunciation date.

Nevertheless, this will only help with the tax liability. All the usual compliance and reporting obligations attached to an expatriation will continue to apply.

All in all, the arrival of an American royal is going to introduce a new level of complexity to the Royal accounts – at least for the next 18 years. It seems that the new arrival will be keeping the Royals up at night – in more ways than one!

Contact Frank Hirth’s US/UK tax experts to learn more about how they can help you.

Author: Matthew Pannell,  Associate Director at Frank Hirth

To email Matthew click here

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