Prince Harry (Part II) – Does US Citizenship Wait in the Royal Wings? What about the Impact on the Royal Family?

Part I of this blog post examined the US tax issues faced by the Duke of Sussex who moved with Duchess Meghan to Los Angeles in March 2020.  Given the significant number of days of physical presence in America, Prince Harry has most likely already met the “substantial presence test” and is being taxed the same as if he were a US citizen.  There are now rumors that he is considering giving up his British citizenship in order that Meghan, can pursue a career in US politics.  It is possible that US citizenship could be in Harry’s future.

Today’s post continues detailing the tax lessons for any individual who is considering attaining “US status” – be it by obtaining a green card, US citizenship or through extended physical presence in America.  Quite often the individual’s US status will have an unwelcome hefty impact on foreign family members, too.

Let me continue to explain through Harry some salient elements of the US tax system that one faces with US tax status.   I will also briefly look at what might happen if Harry were to become a US citizen but then wish to relinquish it later in life  (for example, if the marriage ends in tears, as predicted by a royal aide). The complicated US “expatriation” tax regime would have a very big impact on Harry and his US children, Archie and Lilibet.

Fourth Lesson, You’ll Have To Deal with FATCA

Surely you have heard of FATCA.

FATCA is the acronym for the Foreign Account Tax Compliance Act, which became law in 2010 and which has gained traction all over the world.  Just like a glacier, FATCA has slowly but tenaciously destroyed everything in its path.

Among other things, FATCA imposed a requirement on US individuals to file Form 8938 (“Statement of Specified Foreign Financial Assets”). This form must be filed by taxpayers with specific types and amounts of foreign financial assets or foreign accounts. Taxpayers must determine whether they are subject to this reporting requirement because the law imposes very harsh penalties for noncompliance. Given your wealthy status, I think it’s a safe bet to say you’ll be filing this one!  More detailed information about the reporting rules for Specified Foreign Financial Assets and Form 8938 can be found here.

Payment of US taxes must be made in US dollars. Making actual tax payments if you are an American abroad can be a bit cumbersome if you do not maintain a checking or other account in the United States.  While this might not impact you, Harry, the problem here is that due to FATCA, many US financial institutions do not want American clients if they lack a US residential address.  Due to FATCA a non-US financial institution may also not want to continue a customer relationship with a US person.  Especially for many Americans abroad practical problems must be sorted out with non-US banks, including possible mortgage issues.  Before taking on US status, people are well advised to see if their non-US bank will continue carrying their mortgage. Many foreign banks have dumped their US customers and called in the mortgage loans in the process.

Fifth, You Will Meet and Learn to Live with Mr. FBAR

US persons who have ownership or control (for example signature authority) of foreign (again, non-US) accounts with an aggregate value of over US$10,000 in the calendar year must annually file the so-called notorious FBAR, or foreign bank account report.   Accounts required to be disclosed include bank, securities, financial instruments accounts, accounts held in commingled funds (mutual funds) when the account holder holds an equity interest in the fund and foreign life insurance or annuities with a cash surrender value. Penalties for not filing this form can be very harsh and you cannot expect much sympathy from the Internal Revenue Service if you slip up.

Curious? You can read more about FBAR at my tax blog posts here.

Sixth, You Cannot Forget about US Gift and Estate Taxes

The US Estate tax is a transfer tax assessed on the estate of the deceased. The tax is imposed at a maximum 40% rate, on the transfer or the passing of assets at the death of an individual (for example, passing of assets to heirs). Estate Tax is imposed on the FMV of assets owned by the deceased at death. For US persons (that is citizens or foreign persons treated as “domiciled” in the US), the tax is asserted on the FMV of worldwide assets no matter where located, no matter when acquired.  For non-US persons (non-citizens and non-domiciled)only assets that are treated as “situated in” the US at the time of death are subject to the Estate Tax.

The US also has another transfer tax, called a Gift Tax. This tax is imposed on the transfer or the passing of “taxable gifts” during life from the giver of the gift (donor) to the recipient.  The Gift Tax is imposed on the donor.  It is based on the FMV of the assets transferred, again at a maximum rate of 40%. For US persons as defined in the paragraph above, the tax is asserted on all taxable gifts made regardless of the location of the assets at the time of transfer. For non-US persons the rules are different – only tangible assets situated within the US at the time of the gift are subject to the Gift Tax.

Seventh, If Ever You Regret Your Decision……

Dear Harry, if, after having become a US citizen you regret having made this monumental choice, you should know that getting rid of your US citizenship will be much easier said than done and can harshly impact not only you but your US loved ones.  Assuming you will be a “covered expatriate” (you will be one, for example, if you have a net worth of USD2 million or more) you’ll be hit with a so-called “Exit Tax”.  In addition, gifts or bequests from so-called “covered expatriates” are taxable to the US recipient of that gift or bequest at the highest gift or estate tax rate in effect at the time of receipt. Currently, the highest Gift and Estate Tax rate is 40%.  So you must think about Archie and Lilibet. 

I am sure Boris Johnson can undoubtedly fill you in on the gruesome details of expatriating the US.  In the meanwhile, however, you can learn all about the US tax issues upon “expatriation” at my tax blog posts here and  here.

I am an expert in expatriation and have been working on expatriation cases since 1993. I have seen how the laws have evolved since that time which brings invaluable knowledge.

Good luck! And do let me know if I can help with your tax planning.

Posted August 11, 2022

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