The recent announcement by the Duke and Duchess of Sussex to step back from their ‘senior’ royal status has brought back into focus that the duchess is a US citizen. When their marriage was first announced, several articles raised this, pointing out that, as such, she would still be liable for US tax. This raised concerns that the financial aspects of the royal family could come under the watchful eye of the Internal Revenue Service (IRS).
While this is something of a red herring, nevertheless, marriage between a US citizen and a non-American is quite common in the UK. This ‘split nationality’ of the marriage raises several tax issues that are quite different from a marriage where both parties are the same nationality.
The duchess, as a US citizen, is subject to all US tax laws. Being a member of the royal family provides her with no unique protection (other than sophisticated tax advisers who we can assume she has available to her). Thus, she must file US income tax returns on an annual basis reporting her worldwide income and pay tax on this whether she lives in the UK, Canada or anywhere else. Assuming she is or will become, a UK tax resident (subject to UK tax rules), she may be able to reduce her US tax by any tax she pays here. This would also hold true if she becomes a Canadian resident.
The US has several tax filing positions a taxpayer can take depending on their marital status. One of these options is what is referred to as ‘married filing jointly’. Under this option, a married couple can combine their income and the resulting tax is usually less than it would be if they were two single individuals. However, if a US person is married to a non-US person, their filing status must be as ‘married filing separately’. As such, their individual tax liability will, more often than not, be higher than if they were allowed to file a joint return. These two aspects of the duchess’s filing requirements apply to all US taxpayers residing in the UK (or Canada).
What other aspects of the US tax system will apply not only to the duchess but to all other US citizens living in the UK? We know she has sizeable assets in her own right. If these are invested in non-US companies complex income tax rules will apply as well as extensive reporting requirements.
Home Ownership and Children
If the duchess owns any of the residential properties she and her husband use as residences, and if any of these properties are sold or transferred, a US tax liability can result. If there is a gain, this will be subject to capital gains tax. Further, if she gifts the properties a gift tax liability will arise. This brings up the US estate and gift tax rules. While the US offers a substantial nil rate band on such transfers (currently $11.Sm) any amounts transferred during her life (or at death) and which exceed Duke and Duchess babythis amount will result in a 40% estate or gift tax liability. These rules will apply not only to transfers to her husband (which are probably unlikely) but to her children as well. Further, should the duchess receive any gifts from the duke (or any other member of the royal family) and the annual amount exceeds $100,000 she will be required to report these to the IRS.
Speaking of her children, under current US citizen rules, any child born to the duchess will be a US citizen and will become a US taxpayer at birth. Until the child reaches majority, he (or maybe a she in the future) will not be able to give up their US citizenship, should they wish to do this. Thus, potentially, the number of royals falling within the US tax grasp will continue to grow.
Trusts and Expatriation
While we do not know the various financial arrangements of the royal family, we can assume that there are likely to be a number of trust arrangements in place for its members. If this is the case, Archie will be subject to the extremely complex US tax reporting rules applicable to US beneficiaries of a non-US trust.US Expatriation
Finally, can the duchess give up her US citizenship? Of course she can, if she so desires; but this is not without costs. The US system has what is generally referred to as an ‘exit tax’. If an individual has a net worth of more than $2m, this tax will treat all her assets as being sold on the day before she expatriates. To the extent the gain exceeds a specified amount, she will be liable for an income or capital gains tax.
From recent articles, it appears the couple will spend a substantial amount of their time in North America although it is not clear whether this will be primarily in Canada or the US. In either case, both the duke and duchess will have to be aware of the tax residency and other tax rules that apply in both countries.
So, the duchess and her children, while living in: the rarefied atmosphere of the royal family, are nevertheless subject to the same onerous and complex US tax rules; and these same rules apply to each and every US citizen living in the UK.
The article was written by USTAXFS Tax Director, Andrew Aldridge, in January 2020. It was first published in and is copyrighted by Taxation magazine.
Have a question? Contact Darlene Hart at USTAXFS.