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International trusts, tax and estate planning
Associate Aidan Grant considers the tax implications for Harry and Meghan as they announce they are expecting their second child.
15 February 2021
News of a baby is always a joyous celebration for a couple and their family. For the estate planning lawyer, it represents a timely opportunity for the couple to reflect on their planning and whether it still achieves the desired objectives. Shortly after the birth of Harry and Meghan’s first child I wrote of the difficulties Meghan faced from being a US citizen living in the UK and how the two jurisdictions sought to tax her at the same time (available here).
Now that Harry and Meghan have ceased to be UK resident, does that mean that they are no longer exposed to UK tax?
Answering that question depends on which individual and which taxes we are talking about. Harry and Meghan are no longer UK resident, meaning that HMRC will no longer seek to tax them on their worldwide income and capital gains (subject to Meghan’s ability to have claimed the remittance basis of taxation). Instead, as non-residents, Harry and Meghan are, generally speaking, only liable to UK tax on their UK-situs income and on specific UK capital gains (such as on the sale of UK land).
Where matters become more complex is over the question of inheritance tax, and whether Harry and/or Meghan are still UK domiciled (or deemed domiciled). If an individual is UK domiciled or deemed domiciled then their worldwide estate is exposed to inheritance tax. Conversely, if they are neither UK domiciled nor deemed domiciled then broadly speaking only their UK assets are exposed to inheritance tax (and, even then, subject to the potential reliefs provided by a relevant tax treaty).
Domicile (for UK purposes) is based on the common law concept of where an individual’s permanent home is, i.e. the jurisdiction to which they feel the strongest ties. Having since returned to the US, one might understandably argue that Meghan does not consider the UK her permanent home anymore (or, indeed, whether she ever did in the first place).
Harry poses an entirely different conundrum. It is entirely arguable that, as an individual born into the Royal Family and whose grandmother is the sitting monarch, it would be impossible for Harry to throw off his UK shackles to such an extent to convince anyone that he doesn’t ultimately still consider the UK his permanent home. Indeed, similar rules already exist for sitting Members of Parliament who, since 2010, are considered automatically UK resident and domiciled. Were Harry to attempt to claim non-domiciled status one suspects it might set off a small, tax-shaped explosion at the heart of the British monarchy and in the broadsheets.
However, if we imagine that Harry had indeed successfully lost his domicile status, then he would be in the same position as Meghan, i.e. he would remain deemed UK domiciled for three calendar years. That said, HMRC would treat them very differently upon their return to the UK. Whereas Meghan would have restarted her ’15 out of 20 years’ clock, Harry would be considered a ‘formerly domiciled resident’, i.e. an individual born in the UK with a UK domicile of origin, who moved overseas and acquired a new domicile of choice, before becoming UK resident again. In those circumstances, upon resuming UK residence, Harry would be considered deemed UK domiciled from the first tax year of his return for income tax and capital gains tax, and for inheritance tax the following tax year. As such, for the rest of his life Harry can only over avoid the tax consequences of deemed UK domicile status while he remains non-resident.
All of this is to say nothing of the application of the US/UK Gift and Estate Tax Treaty, which governs what to do when both the US and UK claim an individual as a domiciliary of their respective jurisdiction. But that is, perhaps, for another time.
15 February 2021
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