IHT
Matters become more complex with IHT due to the question of whether Harry and Meghan are still UK domiciled (or deemed domiciled) now that they have left the UK.
Domicile status is based on an individual’s intentions, but this is very difficult for the individual or HMRC to definitively prove one way or the other.
Where an individual might claim to be non-UK domiciled (because for example they have ceased to be UK resident), the UK authorities have given themselves the tools to retain individuals inside the UK tax net for a period of time through labelling individuals as deemed UK domicile.
How the domicile and deemed domicile rules apply to Harry and Meghan differ in a few important ways.
Meghan
Having returned to the US, Meghan might argue that she does not consider the UK her permanent home. Of course she may even argue she never intended to remain permanently in the UK (and thus she was never UK domiciled), although others might counter that making the UK one’s permanent home should be in the reasonable contemplation of anyone marrying a prince seventh in line to the throne.
- However, if Meghan never became UK domiciled then her departure from the UK is relatively straightforward. An individual must be UK resident for 15 out of the last 20 tax years to be considered a 'long term resident' deemed domiciliary in any given tax year. Therefore, if Meghan remains outside the UK for long enough this 'clock' will reset and she would have a further 15 years of UK residence before having to worry about becoming deemed UK domiciled. Of course, Meghan could always return with an intention to remain here permanently, giving her an actual UK domicile, in which case this would override the deemed domicile question.
- However if Meghan was actually UK domiciled at some point (but, we assume, she has since lost it), then she will remain deemed domiciled for three calendar years from the date that she lost her UK domicile status (a 'lost domicile' deemed domiciliary). This anti-avoidance rule prevents a UK domiciliary leaving the UK, declaring themselves non-domiciled and then promptly engaging in activities that would have otherwise incurred UK tax had they remained UK domiciled.
Harry
Harry poses an entirely different conundrum. Given that Harry’s grandmother, father and brother represent the current and next two monarchs, one might conclude that it would be difficult for Harry to ever claim that the UK is not his permanent home. Indeed, were Harry to claim to be non-domiciled this would likely trigger a fiscal and constitutional crisis.
However, if we imagine that Harry had indeed lost his UK domicile status, then he would be a 'lost domicile' deemed domiciliary and subject to the same three-calendar years rule as Meghan.
However, where HMRC’s treatment of Harry and Meghan would differ significantly would be upon their return to the UK. Unlike Meghan, who could restart her '15 out of 20 years' clock, Harry would be considered a ‘formerly domiciled resident’ deemed domiciliary.
This is because he is: (1) an individual born in the UK with a UK domicile of origin; (2) who moved overseas and acquired a new domicile; and then (3) becomes UK resident again. In those circumstances, upon resuming UK residence Harry would immediately become deemed domiciled for income tax and CGT purposes, and deemed domiciled for IHT purposes in the following tax year. As such, for the rest of his life Harry can only ever avoid the tax consequences of being a UK (deemed) domiciliary while he remains non-resident.
Of course, if Harry remains UK domiciled then discussion of his potential deemed domicile status is irrelevant.
Finally, it needs to be remembered that of course Harry is also moving out of the UK fire and into the US frying pan. Not only does Harry have to worry about the US federal tax rules, as a Californian he must now also contend with the high level of California state taxes. Even worse, the UK does not generally allow a foreign tax credit for US state taxes.
