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Tax Free Royal Duties?
Lee Hamilton of Blick Rothenberg looks at the tax challenges ahead for Meghan Markle
This time tomorrow, Meghan Markle will be a member of the Royal Family having married Prince Harry. The event has undoubtedly become a huge news topic in both the UK and the USA, but one of the, perhaps, unexpected effects of the Transatlantic union is that it has raised public awareness of exactly what an American living in the UK, like Ms Markle, has to be aware of with complex regulations and financial rules to follow.
The latest reminder of the complexities has come courtesy of Lee Hamilton, a Senior Partner at accountants Blick Rothenberg, who have an expertise in US Tax.
Lee starts by highlighting issues of domicile: "Although Meghan will become resident under UK tax rules and will be married to Prince Harry (a UK domiciliary), she could remain non-UK domiciled. Fortunately for Meghan, the Domicile and Matrimonial Proceedings Act (1973) enabled women to establish a domicile independent of their husband. Under the UK rules, Meghan will have acquired the non-domiciled status of her father when she was born."
Lee points out that “Unlike most people in the UK, this means that Meghan could benefit from several major UK tax concessions".
“Whether Meghan will receive a ‘salary’ or ‘allowance’ from the Royal Household is not clear. However, if she does receive any taxable employment income, her non-domicile status means that she can claim tax relief in respect of her non-UK duties for the first three tax years that she is resident in the UK. Non-domiciled status means that Meghan’s non-UK investment income will not be subject to UK tax, provided that she does not remit this income to the UK. This is known as the ‘remittance basis’ of taxation and can apply for up to 15 tax years from the date that Meghan became UK resident.”
Lee also highlights another potential advantage of being non-UK domiciled: "There are also inheritance tax benefits of being non-UK domiciled. For non-UK domiciliaries such as Meghan, UK inheritance tax is only due on UK assets. Whilst these advantages are available to non-domiciliaries, Meghan would still have to elect to be taxed in this way via her UK tax return."
The big question, though, is will Meghan remain non-UK domiciled? Lee says that "In time, Meghan is likely to lose her non-UK domicile status. However, in the short term, she could still be non-UK domiciled. The non-domicile status that Meghan acquired at her birth (known as a domicile of origin) is hard to change unless she chooses to change her domicile and the evidence demonstrates that she had in fact changed her domicile".
HMRC would normally consider a range of factors when determining whether an individual had changed their domicile and these are based largely on case law. Lee added, “In Meghan’s case, these factors would include whether she had to stay in the UK for reasons beyond her control, whether she has made a will under English or Scottish law and whether she has children in the UK. Surprisingly, although Meghan will become a UK citizen in due course, this does not necessarily mean that she will be deemed to have renounced her non-domiciled status but is certainly something that HMRC would take into account. To date, we have not come across 'marrying a Royal' as a consideration, it would certainly be a factor that HMRC would consider.”
“Complicating all of this is the fact that Meghan is a US citizen. This means that, irrespective of her residence status in the US, the US will still seek to tax Meghan’s worldwide income. This may reduce the effectiveness of any UK tax planning, although fortunately the US will usually allow credits to be claimed in respect of UK tax paid on any income which is also taxed in the US.”
Although this weekend will be all about the Wedding and celebrations, Meghan's move to the UK has undoubtedly sparked more interest in the trials of American citizens seeking to move to the UK. Do contact a US Tax expert if you are affected by these type of regulations; Lee's details are below.