Why is company, fund and equity income taxed so differently by the US and UK?
Company, fund and equity income is where the US and UK systems diverge most, because each country decides for itself what an entity is, when income arises and what kind of income it is. The same profit can be taxed under different labels in different years.
A salary paid in London is employment income in both countries, taxed in broadly the same period, and the US foreign tax credit (opens the official IRS page in a new tab) lines up with the UK tax withheld. That alignment breaks down once a company, a partnership, a fund or a share plan stands between the person and the money, because each tax authority applies its own rules to that vehicle without reference to the other.
- Entity classification: the US may treat a UK company as a corporation, a partnership or as if it did not exist. HMRC applies its own tests to a US LLC and often reaches the opposite answer.
- Timing: the US taxes some company and fund profits as they are earned, while the UK usually waits for a distribution.
- Character: one receipt can be a capital gain on the US return and income on the UK return, which changes the rate and the foreign tax credit category.
Relief from double taxation depends on both countries taxing the same income, of the same kind, in years close enough for a credit to be used. Where any of those fail, tax can be paid in full to both. Our guide to US and UK tax returns for Americans in the UK covers the personal returns these forms attach to, and our guide to US-UK double taxation covers credits and treaty claims.
| Profile | Main US filings | Main UK filings |
|---|---|---|
| US person owning a UK limited company | Form 1040 with Form 5471, Form 8992 and Form 1116 | Company accounts and Company Tax Return, PAYE, Self Assessment |
| UK resident owning a US LLC | Form 5472 with a pro forma Form 1120, or Form 1065 and Schedule K-1 | Self Assessment with foreign pages |
| Fund manager holding carried interest | Form 1040 with Schedule K-1 and K-3, Form 8865, Form 8621 | Self Assessment, including partnership pages |
| Executive with RSUs or options | Form 1040 with Form 8949 and Form 1116, state returns | PAYE at vest or exercise, Self Assessment for gains |
| Executive receiving a Schedule K-1 | Form 1040 or Form 1040-NR, state non-resident returns | Self Assessment with foreign or partnership pages |
Does a US citizen who owns a UK limited company have to file Form 5471?
Usually yes. A US citizen or green card holder who owns ten per cent or more of a UK limited company, or who controls it, files Form 5471 with their US return each year. Where US shareholders together own more than half, the company is a controlled foreign corporation.
The US treats a UK private limited company as a foreign corporation by default. A US person who owns ten per cent or more of its shares by vote or value is a US shareholder. If US shareholders together own more than half of the vote or value on any day of the year, the company is a controlled foreign corporation, or CFC. Ownership includes shares held through entities and shares attributed from family members.
Who files, in outline
Form 5471 sorts filers into categories that decide which schedules are due, set out in the Instructions for Form 5471 (opens the official IRS page in a new tab). One person can fall into several categories at once.
| Category | Who it covers | Typical UK case |
|---|---|---|
| 1 | US shareholders of a specified foreign corporation, which includes a controlled foreign corporation | Overlaps with category 5 for most founders |
| 2 | US officers and directors when a US person acquires a ten per cent holding | A US director of a UK company taking on a US investor |
| 3 | US persons who acquire or dispose of shares and cross the ten per cent line | A founder at incorporation or after a funding round |
| 4 | US persons who control the company | A sole founder or majority owner |
| 5 | US shareholders of a controlled foreign corporation | Any ten per cent US owner of a US-controlled company |
The form restates the company's accounts under US principles in US dollars. It is attached to the income tax return and takes the same due date and extensions, so the timetable for the UK accounts drives the timetable for the owner's US return.
What a missed form costs
The initial penalty is $10,000 for each Form 5471 (opens the official IRS page in a new tab) for each year, with further penalties if the failure continues after the IRS sends notice, and a possible reduction in foreign tax credits. The second consequence is less visible. Until the information is supplied, the period in which the IRS can assess tax stays open, and it can stay open for the whole return, not only for the company.
How does GILTI, now net CFC tested income, tax the profits of a UK company?
A US shareholder of a controlled foreign corporation is taxed each year on a share of the company's income under two regimes: Subpart F for mainly passive income, and net CFC tested income, formerly GILTI, for most of the rest. The tax applies whether or not the UK company pays a dividend.
For decades the main anti-deferral regime was Subpart F. It requires a US shareholder to include a share of certain categories of a CFC's income in the year the company earns it. The categories are mostly passive, such as dividends, interest, rents and royalties, together with some sales and services income earned through related parties. A UK trading company with outside customers often has little of it.
In 2017 Congress added a second regime, global intangible low-taxed income or GILTI, that reaches most of the remaining profit. Despite the name, it applies to the trading income of an ordinary company, so a US founder of a UK agency or consultancy computes an annual US inclusion on Form 8992 (opens the official IRS page in a new tab) even when every pound stays in the company.
A US corporate shareholder receives a deduction against the inclusion, claimed on Form 8993 (opens the official IRS page in a new tab), and a credit for part of the foreign tax the company has paid. An individual receives neither by default, so a US founder can be taxed at ordinary US rates on profit that has already borne UK corporation tax.
Options to review
- A section 962 election, under which an individual is taxed on the inclusion as if a US corporation, bringing in the corporate deduction and credit, at the cost of a further US charge when the profits are distributed.
- The high-tax exception, an election to leave out income that has borne foreign tax above a threshold set by reference to the US corporate rate. Whether UK profits qualify depends on the effective rate computed under US rules.
- A change of entity classification, so that the company is no longer a corporation in US eyes, covered in the next section.
These are options to review, not recommendations, and each interacts with the foreign tax credit limitation on Form 1116. Income taxed under either regime can generally be distributed later without a second US income tax charge, so records must be kept from the first year. Our international tax service models the alternatives before the year closes.
Should a US founder check the box on a UK limited company?
A UK private limited company is an eligible entity, so its US owner can elect to treat it as a disregarded entity or a partnership for US tax. The election removes the controlled foreign corporation rules and allows a direct credit for UK corporation tax, but it has costs.
US rules divide foreign entities into those that are always corporations and those that may choose. A UK public limited company is always a corporation. A UK private limited company is an eligible entity: a corporation by default because its members have limited liability, unless the owner elects otherwise on Form 8832. The election is commonly called check-the-box.
With one owner, an electing company becomes a disregarded entity, whose income and assets are treated for US purposes as the owner's own. It is reported on Form 8858 and its profit appears on the owner's Form 1040 as it is earned. With two or more owners it becomes a partnership, reported on Form 8865.
| Point | Default: foreign corporation | Elected: disregarded entity |
|---|---|---|
| US information return | Form 5471 | Form 8858 |
| Anti-deferral regimes | Subpart F and net CFC tested income apply | Do not apply; all profit taxed on the owner as earned |
| UK corporation tax | No credit for an individual unless a further election is made | Generally creditable by the owner as tax paid on their own income |
| UK dividend | Dividend income in both countries | UK tax on a payment the US does not see |
The trade-offs
The election changes nothing in the UK. The company still pays corporation tax, runs PAYE and pays dividends that HMRC taxes. UK dividend tax then arises on a distribution with no US counterpart, so the credit has to be matched to income of the right category and year. An owner treated as carrying on the business personally also has to consider US self-employment tax at 15.3% and the cover given by the totalization agreement (opens the official SSA page in a new tab) where UK National Insurance is paid.
An election made when the company is formed has no tax cost. An election for an established company is treated as a liquidation, which can produce a US gain on the growth in value. Once made, a classification generally cannot be changed again for a period of years. The election is an option to review as part of business incorporation planning, and it is not right for every founder.
Should a US founder take salary or dividends from a UK company?
The usual UK advice to take a small salary and larger dividends often fails for a US founder. Profit left in the company to fund dividends can be taxed in the US under the controlled foreign corporation rules, and dividend income falls into a separate foreign tax credit category from salary.
For 2025/26 a UK company pays corporation tax (opens the official GOV.UK page in a new tab) at a main rate of 25%, with a small profits rate of 19% for companies with profits under the lower limit and marginal relief in between. Salary is deductible in computing those profits and bears income tax and National Insurance through PAYE. Dividends are paid from profit after corporation tax, carry no National Insurance and are taxed at dividend rates lower than the rates on salary, so a UK-only owner usually favours dividends.
The US return sees the two payments differently. Salary is foreign earned income in the general category, where UK income tax usually covers the US tax. A dividend can qualify for the lower US rates, but it sits in the passive category, where the UK tax on dividends (opens the official GOV.UK page in a new tab) may not cover the US charge, and excess credits from salary cannot be used against it.
- Profit retained to pay later dividends may be taxed on the owner before any dividend is declared.
- Dividends and gains can attract the net investment income tax at 3.8%, which is generally not creditable under domestic law, and treaty-based claims are contested.
- Salary reduces company profit, at the price of employer and employee National Insurance.
- The foreign earned income exclusion can apply to salary but not to dividends. Our article on the foreign tax credit or the exclusion in the UK compares them.
There is no single answer. A founder with modest profit may pay everything out as salary, while one building value for a sale may accept an annual US inclusion. The decision should be modelled on both returns each year against the company's forecast, which is the core of our CFO advisory work.
UK reliefs the US return does not follow
The Enterprise Investment Scheme and the Seed Enterprise Investment Scheme give UK income tax relief on subscription and can exempt or defer UK gains. Business Asset Disposal Relief reduces the UK rate on a qualifying sale. These are UK reliefs that the US return does not follow: the gain is taxed under US rules, and because the UK tax is lower or nil, there is less foreign tax to credit.
How is a US LLC taxed when its owner lives in the UK?
The US usually treats an LLC as transparent, taxing its members on the profits as they arise. HMRC generally treats a US LLC as a company and taxes UK resident members on distributions instead. Relief from double taxation is therefore not automatic.
An LLC with one member is disregarded for US federal tax by default, and one with several members is a partnership. In each default case the members, not the LLC, are taxed on profit in the year it is earned, whether or not it is paid out. A UK resident member who is not a US person is taxed on income effectively connected with a US business and files Form 1040-NR.
HMRC classifies foreign entities under its own tests, and its general view is that a US LLC is a company whose profits belong to it and not to the members. The UK member then has no UK income until the LLC distributes, and the distribution is taxed as a dividend. HMRC may regard the US-taxed profit and the UK-taxed dividend as different income, which restricts credit for the US tax.
A US citizen living in the UK who owns an LLC faces the same mismatch. Electing corporate treatment aligns the two countries' views of the entity but adds US corporate tax. The structure is best decided before the business starts trading, which our businesses and corporates division handles alongside the UK position.
Form 5472 for a foreign-owned US company
A US corporation that is at least one quarter foreign owned files Form 5472 to report transactions with its foreign owner and other related parties. The same duty applies to a US LLC wholly owned by one foreign person, even though the LLC is otherwise disregarded: it files a pro forma Form 1120 with Form 5472 (opens the official IRS page in a new tab) attached. Capital contributions, loans and distributions all count. The penalty is $25,000 for each form for each year.
A UK company with US customers or a US subsidiary certifies its foreign status and any treaty claim on Form W-8BEN-E, which goes to the payer and not to the IRS.
What tax does a US founder pay on selling a UK company?
A US founder resident in the UK is taxed on the sale by both countries. The UK charges capital gains tax on the sterling gain, the US taxes the dollar gain, and a foreign tax credit links the two. Timing, currency and character decide whether the credit works.
For 2025/26 the UK taxes a gain on shares at Capital Gains Tax (opens the official GOV.UK page in a new tab) rates of 18% and 24%, after an annual exempt amount of £3,000. The US taxes the same sale as a long-term capital gain if the shares were held for more than a year, and the net investment income tax can apply on top. UK tax frequently covers the US income tax, provided the credit can be claimed.
Where the two computations part
- Currency: the US gain is measured in dollars, using the exchange rate when the shares were acquired and the rate on sale.
- Character: on a sale of shares in a controlled foreign corporation, part of the US gain can be treated as a dividend to the extent of the company's untaxed earnings.
- Source: a US citizen's gain on shares is not always foreign-source under US domestic rules. Where it is not, the treaty's re-sourcing rule may be needed, disclosed on Form 8833.
- Deferred consideration: earn-outs, loan notes and share exchanges can defer the UK gain under rules the US does not share.
Credit timing
The US tax year is the calendar year and the UK tax year ends on 5 April. A sale completed in February falls in one US year, but the UK tax on it is not payable until 31 January of the following year. A taxpayer who claims credits when foreign tax is paid would owe US tax on the gain with no UK tax yet to credit. Claiming credits on the accrual basis, or carrying the credit back, usually solves this, and unused credits can be carried back one year and forward ten.
Buyers also ask about the seller's US filings, and missing Forms 5471 become price adjustments or indemnities in due diligence. Our M&A tax service reviews the structure on both sides, and our guide to the IRS streamlined filing procedures explains the catch-up routes for owners who are behind.
How is carried interest taxed for a US person living in the UK?
A US person resident in the UK is taxed on carried interest by both countries. The US generally treats it as capital gain if a three-year holding period is met. From 6 April 2026 the UK treats it as trading profit within income tax.
The US position
For US purposes carried interest is a partnership profits interest. Its grant is generally not taxed, and the holder is taxed on a share of the fund's gains as the fund realises them, with the character flowing through on Schedule K-1. Section 1061 adds a condition: gain allocated to a carried interest is long-term only where the underlying asset was held for more than three years. Gain that fails is taxed at ordinary rates.
The UK position from April 2026
Until 5 April 2026 the UK taxed most carried interest under capital gains tax. A revised regime has had effect from 6 April 2026. It sits wholly within income tax: carried interest is treated as the profits of a trade, charged to income tax and Class 4 National Insurance. Where the carried interest is qualifying, which depends on the average period for which the fund holds its investments, only a set proportion of the profit is charged.
The regime applies to UK residents and can also reach a non-resident to the extent the carried interest relates to investment management services performed in the UK. Each fund should be checked against current HMRC guidance.
What the mismatch does to credits
| Point | United States | United Kingdom from 6 April 2026 |
|---|---|---|
| Character | Follows the fund's income, usually capital gain | Deemed trading profit within income tax |
| Holding period test | More than three years, asset by asset | Average holding period across the fund's investments |
| When taxed | As the fund realises and allocates gains | When carried interest arises to the individual |
The foreign tax credit (opens the official IRS page in a new tab) is limited by category and by source, both measured under US rules, and the UK label of trading income does not change the US character. UK tax on carry is credited only against US tax on foreign-source gain, which may require a treaty claim where the fund sells US assets. Fund agreements can also allocate gain for US purposes before cash is distributed, so US tax can fall due first. National Insurance is a social security contribution and, with a totalization agreement in force, is generally not available as a foreign tax credit.
Planning means tracking each realisation under both holding period tests and forecasting which years will have surplus credits. Our high net worth division works with fund principals on this throughout the life of a fund.
What is a PFIC and when does a US person in the UK file Form 8621?
A passive foreign investment company is a non-US corporation that mostly earns passive income or mostly holds passive assets. UK unit trusts, OEICs and non-US ETFs usually qualify. A US person who holds one files Form 8621 for each fund each year, unless an exception applies.
A foreign corporation is a PFIC if at least three quarters of its gross income is passive, or at least half of its assets produce or are held to produce passive income. The definition catches almost every pooled investment fund organised outside the United States. Individual shares in trading companies are usually not PFICs, but a foreign company that is mostly passive can be one.
| Regime | How it taxes | What it needs |
|---|---|---|
| Excess distribution (the default) | Gains and larger distributions are spread over the holding period and taxed at the highest rate for each earlier year, with interest | Nothing; it applies if no election is made |
| Qualified electing fund | Taxed each year on a share of the fund's income and gains, keeping capital character | An annual information statement, which most UK retail funds do not provide |
| Mark-to-market | Taxed each year on the rise in value as ordinary income; losses limited to earlier gains | Marketable stock, broadly regularly traded on a qualifying exchange |
Form 8621 is filed separately for each PFIC. There is a de minimis exception: where the default regime applies, no election has been made and there has been no excess distribution or disposal in the year, annual reporting may not be required if the total value of all PFICs held is $25,000 or less at year end, or $50,000 for a joint return. The Instructions for Form 8621 (opens the official IRS page in a new tab) set out the other exceptions.
Reporting funds, ISAs and the UK side
Under the UK offshore funds regime, a gain on a non-UK fund without reporting fund status is taxed as income. Reporting fund status is a UK concept with no effect on the US return. A UK-domiciled fund is a PFIC, while a US-domiciled fund avoids PFIC status but is often a non-reporting fund in the UK, and UK product rules can restrict a UK resident from buying it.
An ISA (opens the official GOV.UK page in a new tab) has no US tax protection, so funds inside one are taxed on the US return as if held directly, as our article on why a stocks and shares ISA worries the IRS explains. Funds inside a UK registered pension are generally outside Form 8621 reporting where the treaty treats the scheme as a pension. Our PFIC reporting service reviews holdings fund by fund, including feeder and co-investment vehicles.
How is Schedule K-1 income from a fund or partnership reported in the US and UK?
A partner in a US partnership receives a Schedule K-1 showing a share of income, gains and credits, and a Schedule K-3 for international items. A UK resident partner reports the same share on a UK return under UK rules, and may also owe non-resident tax in some US states.
A US partnership files Form 1065 (opens the official IRS page in a new tab) and gives each partner a Schedule K-1. The partner is taxed on the allocated share whether or not cash is distributed, and each line keeps its character. Schedule K-3 carries the international detail, including the source and category of income and the foreign taxes paid, which a partner needs for a foreign tax credit claim.
Foreign partnerships and Form 8865
Many UK and European funds are limited partnerships that file no US return. A US person with an interest in one may have to file Form 8865. Broadly, it is due from a US person who controls the partnership, from a ten per cent partner where US persons together control it, from a US person who contributes property above set thresholds, and on certain acquisitions and disposals. The penalty regime for Form 8865 (opens the official IRS page in a new tab) resembles that for Form 5471.
Late K-1s and extensions
Funds with layers of underlying partnerships commonly extend their own returns, so K-1s often arrive in late summer. A US citizen abroad has an automatic extension to 15 June, and Form 4868 (opens the official IRS page in a new tab) extends the return to 15 October. An extension is time to file and not time to pay: tax should be estimated and paid by 15 April to stop interest running. Our tax planning service forecasts allocations before the year ends, when estimated payments can still be adjusted.
- State returns: some states tax non-resident partners on income sourced in the state. Our multi-state tax filing service works out which returns are required.
- UK treatment: HMRC generally treats a US limited partnership as transparent, so a UK resident partner is taxed on profit as it arises, apportioned to UK tax years. A US LLC is generally treated as a company, so the UK charge follows distributions.
How are RSUs taxed when you work in both the US and the UK?
Restricted stock units are taxed as employment income when they vest, in both the US and the UK. Where the holder worked in both countries while the award vested, each taxes the part earned by workdays there, and the US taxes a citizen on all of it with a credit for UK tax.
An RSU is a promise to deliver shares once service conditions are met. Neither country taxes the grant. At vesting, the market value of the shares is employment income. In the UK the employer operates PAYE (opens the official GOV.UK page in a new tab), withholding income tax and employee National Insurance. In the US the value is wages, with federal and sometimes state withholding where there is a US employer.
Sourcing for mobile employees
Both countries treat an RSU as earned from grant to vest and apportion it by workdays where the employee worked in both. The UK taxes the UK portion even if the holder has left by the vesting date. The US taxes a non-citizen who has left on the US portion, and a citizen or green card holder on everything. Payrolls do not always apply the split correctly.
Sell-to-cover and the second tax on sale
Most plans sell enough shares at vest to pay the withholding, known as sell-to-cover. The US basis in every share is its dollar market value at vest. Brokers sometimes report sales with a basis of zero or with no adjustment, and a return prepared from that statement taxes the vesting income a second time. Each sale is reported on Form 8949 (opens the official IRS page in a new tab) with the corrected basis.
- Growth after vest is a capital gain in both countries. For 2025/26 the UK charges 18% and 24%; the US rate depends on whether the shares were held for more than a year.
- The UK base cost is the sterling value at vest and the US basis is the dollar value, so currency movement produces different gains.
- UK share matching rules, including the same-day and thirty-day rules and the pooled average cost, differ from US lot identification.
The UK rules for employee share schemes (opens the official GOV.UK page in a new tab) and the US wage rules reach a similar result for a plain RSU, so most errors are in the records. Our cross-border treaty relief service prepares the sourcing computation that supports both returns.
How are stock options and share plans taxed across the US and UK?
Each country gives tax advantages only to its own approved plans. A US incentive stock option is an ordinary taxable option in the UK, and a UK EMI or CSOP option is an ordinary taxable option in the US. The usual result is tax in one country at exercise and in the other at sale.
| Award | US treatment | UK treatment |
|---|---|---|
| Non-qualified stock option | Spread taxed as wages at exercise | Spread taxed as employment income at exercise |
| Incentive stock option | No regular tax at exercise; possible alternative minimum tax; gain at sale | No special status; taxed at exercise |
| EMI or CSOP option | No special status; taxed at exercise | Generally no income tax at exercise; capital gains tax at sale |
| US employee stock purchase plan | No tax at purchase under a qualifying plan | Discount taxed as employment income at purchase |
| Sharesave | No special status; taxed at exercise | Generally no income tax at exercise |
The mismatches are of timing more than amount. A UK resident who exercises an incentive stock option pays UK income tax in the year of exercise, while the US taxes the gain in the year of sale. Unless the UK tax can be carried to that year in the right credit category, both are paid. The exercise is reported to the employee on Form 3921 (opens the official IRS page in a new tab).
The reverse applies to UK plans. A US citizen who exercises an EMI option has US compensation income on the spread with little UK tax to credit, and UK capital gains tax arrives later on sale. An option granted below market value, which EMI permits, can also fall within the US deferred compensation rules, so a UK company granting options to a US person needs a valuation that satisfies US rules as well as HMRC.
Section 83(b) elections
Where a founder or employee receives actual shares subject to vesting, as opposed to units or options, a section 83(b) election lets the holder be taxed on the value at acquisition and treat later growth as capital gain. It must be filed within a short fixed period after the transfer and cannot be made late. The UK has its own election for restricted securities, with its own deadline. Making one does not make the other.
What happens to equity, bonuses and pensions when an executive moves between the US and UK?
A move does not end either country's claim. Awards, bonuses and severance earned partly in the country an executive has left remain taxable there by workdays, some US states continue to tax them, and a new UK resident may qualify for the four-year foreign income and gains regime.
Trailing equity, bonuses and severance
An executive who leaves London for New York with unvested awards remains within PAYE on the UK workday portion as they vest. One who leaves the US for the UK and is not a US person is taxed in the US on the US workday portion and files Form 1040-NR. A bonus is sourced to where the work was done in the period it rewards, and severance generally by the past services it relates to.
Some states tax former residents on equity income by days worked in the state. A state gives no credit for UK tax and is not bound by the federal treaty. Our US state tax returns page sets out the position.
The UK regime for new arrivals
UK residence is decided by the Statutory Residence Test (opens the official HMRC page in a new tab), not by a simple day count. An executive who becomes UK resident after at least ten consecutive tax years of non-residence can claim the foreign income and gains regime (opens the official GOV.UK page in a new tab) for their first four tax years of residence. Foreign income and gains covered by a claim are not charged to UK tax. A claim is made in the Self Assessment return and costs the personal allowance and the capital gains annual exempt amount for that year.
For a US citizen the regime removes UK tax, not US tax. Income sheltered from HMRC is still taxed in full by the IRS, with no UK tax to credit. Our article on what changed for Americans in Britain after non-dom covers the transition from the old rules.
UK pensions and the treaty
Articles 17 and 18 of the treaty deal with two pension questions separately. Growth inside a UK pension scheme is generally protected from current US tax for a US citizen resident in the UK. Relief for contributions is narrower: it is capped by reference to the relief a comparable US plan would receive, and it is limited by the saving clause, which lets the US tax its citizens as if the treaty did not exist, subject to listed exceptions. Claims are disclosed on Form 8833 with the treaty text (opens the official IRS page in a new tab) in hand.
How do gifts, estates and trusts work for wealthy families with US and UK ties?
The US taxes gifts and estates of its citizens wherever they live, and the UK charges inheritance tax on worldwide assets once a person is a long-term resident. A founder with ties to both can be within both systems at once, with relief under a separate estate and gift tax treaty.
| Rule | Figure | Applies to |
|---|---|---|
| US annual gift tax exclusion, 2025 | $19,000 | Gifts to any one recipient |
| US annual exclusion for a non-citizen spouse, 2025 | $190,000 | Gifts to a spouse who is not a US citizen |
| US estate tax basic exclusion, 2025 | $13.99 million | Estate of a US citizen or US-domiciled person |
| UK inheritance tax rate | 40% | Value above the available nil-rate bands |
Transfers between spouses show the difference clearly. The UK exempts most of them. The US gives an unlimited marital deduction only where the recipient spouse is a US citizen, so a US founder who puts shares in a British spouse's name before a sale, a common UK planning step, makes a gift measured against the gift tax (opens the official IRS page in a new tab) annual exclusion for a non-citizen spouse. The excess uses lifetime exclusion and requires a gift tax return.
Since 6 April 2025 the UK has based Inheritance Tax (opens the official GOV.UK page in a new tab) on long-term residence in place of domicile. A person resident in the UK for ten of the previous twenty tax years has worldwide assets within the charge, and remains exposed for a period after leaving. A US citizen in that position faces both taxes on the same assets. The estate and gift tax treaty allocates taxing rights and gives credits, but it is separate from the income tax treaty.
Trusts and Form 3520
A UK trust created or funded by a US person is usually a foreign grantor trust: its income is taxed on the settlor and it is reported each year. A US person who receives a distribution from a foreign trust reports it on Form 3520. The penalty for an unreported transfer or distribution is the greater of $10,000 or 35% of the gross reportable amount, so it scales with the amount. A gift or bequest from a foreign individual is reported once the year's total exceeds $100,000, even though no US tax is due on it.
Family investment companies and offshore bonds each have a US classification to establish before use. Our estate and trust planning service and our trusts and estates division review the US position alongside UK advisers.
What should you do before incorporating, selling a company or moving country?
Before incorporating, selling or moving, establish how each country will classify the entity or award, when each will tax it and whether tax paid to one will be creditable in the other. Most cross-border problems come from decisions made without the second country in view.
Before incorporating: fix the US classification
Decide whether the UK company will be a corporation or a disregarded entity for US purposes while an election is still free of tax, and record every US person's shareholding.
Before incorporating: plan the pay model
Model salary, dividends and pension contributions on both returns together.
Before issuing or accepting equity: check both sets of elections
Diarise the US and UK election deadlines for restricted shares, and confirm how each country treats the other's option plan.
Before a liquidity event: bring the filings up to date
Check that every Form 5471, Form 8865 and Form 8621 has been filed for the open years.
Before a liquidity event: test the structure in both countries
Compute the gain in sterling and in dollars, review deferred consideration for timing mismatches, and settle the foreign tax credit method.
Before moving: build the workday record
Keep a calendar of working days by country from the grant date of every unvested award, and give it to both payrolls.
Before moving: time income around the move
Review which exercises, sales and bonuses are better taken before or after the change of residence.
Common mistakes
- Filing a Form 1040 that mentions neither the UK company nor its profits.
- Following standard UK advice on low salary and high dividends without testing the US result.
- Buying UK funds, including inside an ISA, without checking PFIC status.
- Assuming a plan or relief approved in one country is recognised by the other.
- Leaving a US state without ending residence there, then receiving trailing equity.
- Forming a US LLC from the UK because it is quick, and meeting Form 5472 and the UK classification problem later.
Company bank accounts raise a separate point. A US person with signature authority over the UK company's accounts, or who owns more than half of the company, reports those accounts on the FBAR once the aggregate of all foreign accounts exceeds $10,000, and the shares can be reportable on Form 8938. Our guide to FBAR and FATCA reporting in the UK explains both.
Where filings have been missed, the IRS has established routes for putting them right. To review a company, a fund interest or an equity award before a decision is made, contact US UK Tax Returns with the entity documents and the last returns filed in each country.
General information, not advice. The right answer depends on your circumstances and the tax year concerned.
