Prince Harry and Meghan Markle’s baby’s due date is approaching ever closer. In anticipation of the birth, David Treitel, founder and managing director of American tax returns, spoke to eprivateclient about the potential tax implications for the royal family.

Due to US transmission rules the child will automatically be an American citizen because its mother is, regardless of whether the family apply for an American passport, which means it will be liable to US tax. The US is the only country in the world to have this kind of tax regime in which citizens are always deemed resident for tax purposes regardless of where they actually live, Mr Treitel explained.

Reporting to another country for tax purposes is “unprecedented” for the royal family and so will pose a new challenge for their accountants, as well as potentially opening up the private royal accounts to the Internal Revenue Service (IRS).

Of course, it is expected the baby will have significant wealth. Both the Windsors and Spencers are wealthy families, and Harry is a beneficiary of both of those estates. Mr Treitel said that “one presumes” that there would be provisions in these estates for future unborn children, which would mean the baby will also be a beneficiary. Furthermore, the Duchess of Sussex has a sizeable fortune herself, having previously had a lucrative acting career.

This all makes it likely that the child will receive income from trusts and may also have investments in its name, which could also provide an income. Both of these revenue streams would need to be reported to IRS

Gifts are another issue that need to be considered, as any worth over $100,000 will have to be reported to IRS. For example, it is thought that Meghan had to report her engagement ring. Many people expect that the Queen, and perhaps other foreign dignitaries, will give gifts of or above this value, which will therefore need to be reported.

The requirement here is simply to report rather than pay any tax on the gifts. This was introduced to improve transparency, particularly after 2009 when UBS became the first of many Swiss banks to be fined by the US for facilitating tax evasion.

It would not be wise to make any errors though as there are “substantial penalties if you get it wrong,” with the typical fine being $10,000.  

The only reason there could potentially be a tax requirement is if the gifts were to be sold for a profit, meaning Capital Gains tax would be applicable. However, Mr Treitel emphasised that “it seems unlikely they would sell gifts”.

There is “good news” when it comes to the actual amount of tax payable, which is likely to be “very little”. This is because the US recognises tax paid in the UK to avoid individuals effectively paying two lots of tax.

One thing that is certain is that the royal family’s accountants will be kept busy with “pages and pages of reporting”. However it is unlikely that this will be new to them as “you would expect they’ve been planning for Meghan for a while,” Mr Treitel concluded.