A US citizen living in the UK who sells shares in their own UK limited company is usually taxed on the gain by both countries. The UK charges Capital Gains Tax (opens the official GOV.UK page in a new tab) on the sterling gain, possibly at a reduced rate under Business Asset Disposal Relief. The US taxes the gain measured in dollars and then allows a credit for the UK tax. For a founder who controlled the company, section 1248 can treat part of the US gain as a dividend, and the net investment income tax at 3.8% may apply on top.
This post is for US citizens and green card holders resident in the UK who own a stake in a UK private company and are planning, or have just completed, a sale. It goes deeper than the exit section of our guide to US-UK tax for founders, fund managers and executives. It covers the UK computation, the US view of the same gain, section 1248, the treaty and the credit, deferred consideration and the last Form 5471.
How does the UK tax a founder selling shares
As a capital gain. A UK resident founder pays capital gains tax on the difference between the sale proceeds and the cost of the shares, after the annual exempt amount of £3,000. For 2025/26 the main rates are 18% and 24%. Business Asset Disposal Relief can reduce the rate on a qualifying sale.
GOV.UK sets out the conditions for the relief on shares in your own company, and they must be met throughout the two years up to the sale. For disposals from 6 April 2026 the relief rate is the same as the lower of the two main rates, so the saving now comes mostly from gains that would otherwise fall in the higher band. There is a lifetime limit on gains that can qualify, and the claim must be made by the second 31 January after the end of the tax year of sale.
The general rules on tax when you sell shares (opens the official GOV.UK page in a new tab) govern the rest of the computation, including how shares bought at different times are matched. The sale is reported on the SA100 return with the capital gains pages, and the tax is due by 31 January after the end of the UK tax year. Our UK Self Assessment service prepares that return alongside the US one, so the two computations start from the same facts.
- You are an employee or office holder of the company, or of one in the same group
- The company is a trading company, or the holding company of a trading group
- You hold at least a twentieth of the shares and of the voting rights
- You are entitled to at least a twentieth of either the distributable profits and assets on a winding up, or the proceeds of a sale
- Each condition has been met for at least two years up to the date of sale
How does the IRS tax the same gain
Usually as a capital gain on stock, measured in dollars. The US does not follow Business Asset Disposal Relief or the annual exempt amount. A US citizen reports the sale on Form 8949 and pays tax at long-term capital gain rates if the shares were held for more than a year, subject to section 1248.
The dollar gain can differ sharply from the sterling gain. The US basis is the cost of the shares translated at the exchange rate when they were acquired, and the proceeds are translated at the rate on the date of sale. IRS guidance on foreign currency and exchange rates (opens the official IRS page in a new tab) sets out the translation rules, and the sale is entered on Form 8949 (opens the official IRS page in a new tab).
The net investment income tax (opens the official IRS page in a new tab) at 3.8% can apply to the gain where income is above the thresholds. It is generally not creditable under domestic law, and treaty-based claims are contested. Our individual tax returns service models the charge before completion.
Can section 1248 turn part of the gain into a dividend
It can, for a founder who held a tenth or more of the voting power. Section 1248 applies where a US person sells stock in a foreign corporation and owned that much at any time in the five years before the sale while the company was a controlled foreign corporation. Part of the gain is then included in income as a dividend.
The dividend portion is limited to the company's earnings and profits accumulated while the founder held the shares and the company was a controlled foreign corporation. Earnings that were already included in the founder's income under the anti-deferral rules are generally excluded, so a founder who has reported inclusions each year may find little left to recharacterise. Our posts on Form 5471 for a one-person UK limited company and net CFC tested income explain where those earnings figures come from.
For an individual who held the shares as a capital asset for more than a year, section 1248 also caps the US tax on the dividend portion. The cap broadly combines the corporate tax the US would have charged on the earnings, less the UK corporation tax the company actually paid, with capital gains tax on the rest. The arithmetic depends on the earnings history and is worth working out before completion.
How does the foreign tax credit apply to UK capital gains tax
The UK taxes first and the US gives the credit. Under the treaty, a gain on shares that are not mainly UK property is taxable only in the country of residence, but the saving clause lets the US tax its citizens as if the treaty did not exist. The relief article then requires the US to credit UK tax.
The UK tax treaty (opens the official IRS page in a new tab) also provides that, where the US taxes a citizen resident in the UK, the UK need not credit US tax on gains that are not US-source under UK law. Shares in a UK company are a UK asset, so UK capital gains tax is the primary charge. Our explainer on the treaty saving clause covers why Article 13 does not stop the US charge.
Source then decides whether the credit works. Publication 514 (opens the official IRS page in a new tab) explains that a citizen with a tax home abroad is treated as a non-resident for the sale only if foreign income tax of at least a tenth of the gain is paid. Where Business Asset Disposal Relief, the annual exempt amount or a UK deferral pushes UK tax below that level, the gain can be US-source, and a treaty re-sourcing claim on Form 8833 may be needed. The credit is claimed on Form 1116, and unused credits carry back one year and forward ten.
- Gain on the shares: generally passive category, unless the UK tax makes it high-taxed income
- Any section 1248 dividend: category and rate depend on the earnings and the look-through rules
- UK tax due after the US year ends: the accrual method can match it to the year of sale
- Net investment income tax: generally not creditable under domestic law, with treaty claims contested
What happens with earn-outs and deferred consideration
The two countries can tax deferred amounts in different years. The UK brings ascertainable deferred consideration into the gain at completion, and treats a right to unascertainable future payments, such as most earn-outs, as a separate asset valued at completion. The US may instead tax payments as they arrive under the installment method.
HMRC's Capital Gains Manual treats each later earn-out receipt as a disposal of that separate right, and reliefs on the original sale do not carry over to it. A founder can therefore pay capital gains tax at a reduced rate on the value of the earn-out at completion, then at the main rates on any excess received later. A share-for-share exchange can defer the UK gain altogether, while the US treats the exchange under its own reorganisation rules.
IRS Publication 537 allows the installment method for stock that is not traded on an established securities market, including contingent payment sales where the price cannot be fixed at the end of the year of sale. A seller can elect out by the due date of the return for that year and report the whole gain at once. Electing out can line the US gain up with the UK charge at completion, at the cost of paying US tax on amounts not yet received.
Consider a US citizen living in Bristol who founded a UK software company and sells it to a UK trade buyer for cash plus an earn-out over the next three years. The UK taxes the cash and the value of the earn-out right in the year of sale, with tax due by 31 January. If the US gain is reported on the installment method, UK tax paid on the earn-out value has little US tax to offset that year, and the credit depends on carryovers and the accrual rules covered in our post on which year takes the UK tax credit. Our M&A tax service models both returns against the heads of terms.
What does the last Form 5471 need to show
A founder still files Form 5471 for the year of the sale. The Form 5471 instructions (opens the official IRS page in a new tab) place a US person who disposes of enough stock to fall below the ownership threshold in Category 3, and someone who controlled the company at any time during the year usually remains a Category 4 filer as well.
A Category 3 filer completes Schedule O, and the instructions require the section on dispositions to show what was sold and how. The final year box on the form is for the year a foreign corporation ceases to exist as a corporation, not for a shareholder who sells out while the company carries on. The initial penalty for a missing form is $10,000, and the statute of limitations can stay open until it is filed.
Buyers also check the seller's US filings. Missing Form 5471 returns for earlier years tend to surface in due diligence as indemnities or retentions, and the earnings and profits figures they contain are the same figures section 1248 needs. Founders who own EMI shares as well as founder shares should read our post on EMI options and US citizens, because the exercise is taxed separately. Our cross-border treaty relief service and the guide to US-UK tax for founders, fund managers and executives cover the other decisions around an exit.
- Share purchase agreement, completion statement and any earn-out terms
- Dates and costs of every share acquisition, with exchange rates on each date
- Earnings and profits history and prior inclusions from earlier Forms 5471
- UK capital gains computation and any Business Asset Disposal Relief claim
- Evidence of the UK tax paid, with dates, for the foreign tax credit
General information, not advice. The right answer depends on your circumstances and the tax year concerned.
