RSM is not immune to the general public excitement about a new royal baby, but aside from speculating about gender, names and birthing methods, our minds have turned towards thinking about the tax status of the new seventh in line to the throne. Given the influence taxation had on encouraging American independence from the UK, there is a pleasing irony that the US will be asserting taxing rights over Archie Mountbatten-Windsor, as well as many other UK citizens with much more tenuous connections to the US than having an American parent.
Any child born to two US citizens or to parents that include one US citizen who has lived in the US in the last five years is automatically a US citizen, as is any child born in the US. Boris Johnson, born in New York to British parents, learned this to his cost when the US tax authorities demanded he pay tax on the sale of his UK home, even though this was exempt from charge in the UK. This is not an uncommon situation, with some US citizens never being aware of their status until they try to enter America using their non-US passport.
Basis of tax
Unlike the UK, which broadly only taxes individuals on UK income if they are not UK resident, the US taxes its citizens on their worldwide income and gains regardless of where they live. Even if US tax is not due, US citizens have tax reporting obligations, as do structures they create, such as non-US trusts. This can create practical problems because investment vehicles seen as routine and tax compliant in the UK can be subject to punitive anti-avoidance tax rules in the US. These can include mutual funds and even pension plans, so the opportunities for making an error are substantial.
We have not yet been approached to provide tax advice to Baby Sussex, although it must only be a matter of time before this happens. When (if) we are contacted, our advice would depend on how the family feels about US citizenship. Although it can be an unwanted cost and complication for tax purposes, US citizenship can be a boon in other ways, not least because it makes it easier to live and work in America. Many accidental Americans embrace their status for this reason, and for those who live in the UK it is important to structure their affairs to comply with both US and UK tax rules – and to make sure that all of the paperwork so beloved by the IRS is kept up to date.
Baby Sussex’s proud parents may feel that US citizenship sends out the wrong message for a potential British monarch, however. If they do, they will need to wait a while to act. A child can voluntarily renounce US citizenship between ages 16-18, but not before then. After age 18 it is also possible to renounce, but at the cost of paying expatriation tax.
Meghan and Harry are unlikely to be in any doubt about the nationality status of their children, but for many other families the position is not so clear. Do you know where you and your parents were born?
For more information please get in touch with Andrew Robins.