The UK and US have very different tax laws, particularly when it comes to gift taxes. In the UK, you are allowed to give just £3000 of gifts away per year in the seven years before you die ‒ everything above that is subject to inheritance tax. However, everything given before those seven years is completely tax-free.
This means Harry could continue giving vast sums of money to Archie well into his adulthood without a pound going to the Government.
However, in the US they have a Gift Tax regime, applicable to US taxpayers, in which you can only give $15,000 (£11,600) of tax-free money away per year per person throughout your life.
Additionally, you are allowed to give $11,580,000 (£8,965,000) of tax-free money away to whoever you like ‒ but this includes in your will after you die.
As a US citizen, Meghan automatically has to stick to these rules wherever she is in the world.
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Prince Harry grinned as he held Archie (left); Archie on his first birthday with Meghan (right) (Image: GETTY / The Duke of Sussex)
Harry, Meghan and Archie on their Africa tour last year (Image: GETTY)
However, for Harry to be subject to the Gift Tax regime, he would need to be considered a US person for tax purposes.
To do this, he would need to do one of two things ‒ either become a green card holder, sponsored by Meghan, or spend too much time in the US, triggering the substantial presence test and being unable to rebut the presumption of being a US tax person under a tie-breaker provision in the US-UK tax treaty.
Tax and immigration expert David Lesperance told Express.co.uk: “If Harry becomes a US person for tax purposes and subjects himself to the US Gift Tax regime, then he can currently give $15,000 (£11,777) annually to a single person/entity.
“There is no limit to the total number of $15,000 (£11,777) fits that he gives annually, so long as they are not the same person/entity.
If Harry becomes a US person for tax purposes he will be subject to the US Gift Tax (Image: GETTY)
“On top of this gifting opportunity, Harry has a Unified Credit that allows him to currently give a lifetime cumulative total of $11,580,000 in additional gifts or bequests before a Gift (if living) or Estate (if dead) tax kicks in on the next dollar.
“The bottom line is that Harry and Meghan’s potential tax liabilities, both while they are living and when they die vary enormously depending upon their actions.
“This is where multi-jurisdictional expert advice is mission critical and pays for itself many times over.”
However, there is a flip side to this that if Harry were considered a US person for tax purposes, he may be able to leave Archie more money in his will.
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Baby Archie will grow up in Santa Barbara, California (Image: GETTY)
In the UK, inheritance tax is at 40 percent with a tax-free allowance of £325,000.
Meanwhile, in the US, estate tax is also at 40 percent, but then there is a Unified Credit mentioned earlier, whereby Harry could give or leave in his will a total of $11,580,000 (£8,965,000) tax free.
That said, Harry could give Archie this amount of money tax-free in the UK, he would just have to make sure he gives it to him more than seven years before he dies.
Indeed, Harry could easily give much more than this to his son in the UK devoid of any tax, as long as he lives for another seven years.
In both countries, spouses are exempt from paying any inheritance tax.
Because Meghan is a US citizen, any gifts from the Duchess to Archie are automatically subject to the US’ Gift Tax regime, so the only difference would be for Harry gifting to Archie.
However, with all factors taken into consideration, Harry and Meghan clearly felt like this move would be the best thing for their family.
While they may be more restricted in what they can give their son, they are less restricted in what they do with their lives.
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Instead of spending their days on royal engagements, they are free to pursue commercial interests that will likely generate vast amounts of money, such as their multi-year deal with Netflix believed to be worth around $150million (£118million).
What’s more, Archie will not grow up with the same responsibilities his father did, and the difficulties associated with that.
He too will be free to do whatever he wants with his life, without having to take into consideration how that ties in with his duty to the Royal Family.
