The British tabloids have always had an obsession with the royal family and their relationship with Prince Harry has often been fruitful. Recently, he hit the headlines for having the audacity to step back from his royal duties to focus on his new family (and relinquishing any royal funding in doing so). However, when I recently saw articles trying to sensationalise his tax affairs, I began to think they’d run out of interesting things to print.
As one might expect, the articles are based on conjecture and assumptions. “One tax expert said” and “one accountant explained”, yet neither are quoted by name. Also, some of the details are close but not quite right. That said, they do raise some interesting points that people who have a transatlantic career should bear in mind. There might be pitfalls that could be avoided with some sensible and proactive planning.
Take a typical, young British actor. He has had some reasonable success in the UK and is starting to attract the attention of Hollywood producers. In 2018, he gets a supporting role for a new movie and spends 90 days filming in LA. The film is reasonably successful, and he gets cast as the lead for another, bigger film in 2019, which requires him to spend 120 days in USA filming. To complicate matters, he has started a relationship with his co-star, who is a US citizen. In 2020, this new couple spend half their time in the UK and the other half in the USA, except a four-week stint travelling the world doing all the press for the new film. [In this hypothetical world, there is not a global pandemic preventing international travel.]
Our hero is not worried. An old thespian – who he once performed opposite during a stint in the West End – told him all about his fleeting Hollywood career. “The secret, darling, is to spend less than half the year in the US and you don’t need to worry about taxes there.” So as far as he is concerned, he is fine as he spent less than 183 days in the US. Unfortunately, the old thespian was mistaken.
An individual is tax resident in USA if they are a citizen, a green card holder or meet the conditions of the “Substantial Presence Test”. As an aside, USA is the only country in the world that taxes all its citizen aside from Eritrea. You might recall Boris Johnson has issues with US taxes having been born there and previously holding a US passport. So you can spend not time in the US but still need to file a tax return there.
A lot of countries do have a simple residency rule that states if you spend more than half the year in the country you will be tax resident there. The Substantial Presence Test is a little more complicated (although a lot less complicated than the UK equivalent). The test is as follows:
You will be considered US resident for tax purposes if you are physically present in the US on at least:
- 31 days during the current year, and
- 183 days during the 3-year period that includes the current year and the 2 years immediately before that, counting:
- All the days you were present in the current year, and
- 1/3 of the days you were present in the first year before the current year, and
- 1/6 of the days you were present in the second year before the current year.
Let’s have a quick look at the days for our hero’s travel in the last few years.
| Year | UK | US | ROW | Total |
| 2018 | 275 | 90 | – | 365 |
| 2019 | 245 | 120 | – | 365 |
| 2020 | 168 | 168 | 30 | 366 |
He is lulled into a false security that having spent less than half the year in the US he is fine. However, applying the Substantial Presence Test, let’s look at the result:
| Year | US Days | SPT | |
| 2018 | 90 | 1/6 | 15 |
| 2019 | 120 | 1/3 | 40 |
| 2020 | 168 | 168 | |
| 223 |
Whether he realises it or not, our hero is now US resident. Why this is important is that he now needs to pay taxes on his worldwide income in USA. This could have been avoided had he been more informed, kept better travel records and planned some extra holidays. Or maybe if he’d simply not fallen so deeply in love with his co-star.
My main gripe with the type of articles we saw on Prince Harry is that no one mentions the fact that it is unlikely you will be in the position of paying double tax on the income. Given the top rate of UK taxes on income is 47% (45% income tax plus 2% National Insurance) and the top rate in places like LA is something similar (if you include the state taxes on top of federal taxes), the poor taxpayer would be left with very little cash if both HMRC and IRS took their top rates. Fortunately, most countries have tax treaties that agree who gets to tax what.
In my scenario, our hero will be dual resident – both in the UK and US. The tax treaty between the two countries agrees who is resident in such scenarios and typically, if his only home remains in the UK, he will be “treaty resident” in the UK. So, while he may need to report his worldwide income to the IRS, he should normally only pay taxes for the work performed in the US.
Of course, I fully expect that our young actor will already have paid taxes in the US. The US production company will typically have deducted taxes at source, so it is unlikely in this scenario that he will have a significant additional tax burden – just the cost of hiring a competent US accountant to handle the filing.
Going back to Prince Harry, it would be remiss of me to consider what will happen to his income. Firstly, I am not a US tax advisor and not qualified to give advice on such a matter (let me focus on the UK issues and I’ll introduce you to plenty of US accountants that can). Secondly, I am not privy to the privy purse and have no idea how Prince Harry’s income is made up.
What would have been a more interesting article was to look a Meghan’s potential UK tax exposure. The UK Statutory Residence Test is so complicated that Meghan could have been UK tax resident by spending as few as 16 days in the UK. Now that sounds more outrageous to me than a man spending most of his time living in the US paying taxes there.
The only sensible quote in the articles is this – “it is safe to assume they have had lawyers and tax experts grinding away on this issue for months.” And let’s face it, if anyone is going to be thorough in planning for taxes, it will be the royal family. So, nothing quite so salacious as they make out, but then that is the tabloids. For their sake, I hope Harry dusts off his old fancy dress costume ready for the Halloween weekend.
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