Accountants for US and UK: Advisory Shares & Equity Tax

A UK-resident American paid in shares or options for advising a start-up has taxable income in both countries, usually on different dates, at different values and under different labels. Accountants for US and UK returns reconcile the two, so the award is reported once on each side, credited correctly and carried forward with the right basis.

At Jungle Tax we prepare both sets of returns for advisers, mentors and non-executives whose compensation arrives as paper rather than cash. This guide explains how the award is reported to the IRS and to HMRC, where the two systems disagree, and how years of unreported equity are brought back into compliance. It is written from a return-preparation perspective: what must be reported, when, at what value and on which form.

What are advisory shares, and why do they cause tax return problems?

Advisory shares are equity issued to someone who helps a company without being on its payroll: a sector expert, a mentor, a board observer or a non-executive director. The award is typically a fraction of one percent of the company, vesting monthly over one to three years, and it takes one of three forms:

• Restricted shares issued up front and subject to forfeiture or buy-back if the adviser leaves before they vest.
• Options or warrants to buy shares later at a fixed price.
• Outright shares issued in tranches as services are delivered.

Most published commentary on advisory shares is written for a US-resident adviser to a US company and stops at the section 83(b) election. Most UK commentary deals with employees and tax-advantaged option schemes that an outside adviser cannot use. Neither addresses the American living in London who receives stock from a Delaware company and shares from a UK company in the same year. Three features make that person's returns difficult:

• No cash changes hands, so no payslip, and often no tax form, prompts the reporting.
• The company is usually private, so the value has to be established rather than looked up.
• The US and the UK each classify the adviser by their own tests, and the answers frequently differ.

How does the IRS tax shares received for services?

Section 83: ordinary income at vesting

Section 83 of the Internal Revenue Code applies whenever property is transferred in connection with the performance of services. It is not limited to employees; it applies equally to independent advisers and directors. The service provider has ordinary income equal to the fair market value of the shares, less any amount paid, at the first moment the shares are either transferable or no longer subject to a substantial risk of forfeiture. For shares that vest monthly, that means a separate income event, at a separate valuation and exchange rate, every month. The IRS explains the general rules in Publication 525, Taxable and Nontaxable Income.

What is the 30-day section 83(b) election?

Where restricted shares are actually issued on day one, the recipient may elect under section 83(b) to recognise the income at the date of transfer instead of at vesting. The election must be filed with the IRS no later than 30 days after the transfer. There is no extension and no reasonable-cause relief for a late filing. The IRS now publishes a standard form for the election, although a written statement containing the required information remains acceptable, and a copy must be given to the company.

From a compliance standpoint, the questions we ask on every file are factual ones. Was an election made? Is there proof of timely filing? Was the income then reported on the return for the year of transfer? An election that was filed but whose income was never reported is a common finding, and so is the reverse: income reported at grant with no evidence of an election, which leaves the vesting-date income technically unreported.

How are options granted to non-employee advisers taxed?

Incentive stock options can only be granted to employees, so an adviser's options are non-qualified. An option without a readily ascertainable market value is not taxed at grant. On exercise, the spread between the fair market value of the shares and the exercise price is ordinary income. If the shares acquired on exercise are themselves subject to vesting, section 83 applies again and an 83(b) election becomes available at that point. Separately, an option priced below fair market value at grant can fall within the deferred compensation rules of section 409A, which apply to independent contractors as well as employees and carry their own additional tax.

Is equity for advisory work self-employment income?

For US purposes, an outside adviser is ordinarily an independent contractor, and so is a non-employee director: director's fees are self-employment income under US rules even though the UK treats them as employment income. The value of the shares is reported as business income, typically on Schedule C, and a US company will generally report it to the adviser on Form 1099-NEC. A UK company will issue no US form at all, which does not alter the reporting obligation.

Net earnings from self-employment are prima facie subject to US self-employment tax, and neither the foreign earned income exclusion nor the foreign tax credit removes that charge. What does remove it for most UK residents is the US-UK totalization agreement, under which a self-employed person is generally covered only by the social security system of the country in which they reside. The exemption is supported by a certificate of coverage issued by HMRC, as the IRS describes in its guidance on totalization agreements. Returns that claim the exemption without the certificate, or that omit the income from Schedule SE without explanation, are a frequent cause of IRS correspondence.

How is the US valuation supported?

The income figure is fair market value on the taxing date. For a private US company, the practical evidence is the company's most recent independent valuation prepared for section 409A purposes, which is generally relied upon for up to twelve months unless a material event intervenes. For a UK company with no US-style valuation, the figure must still be fair market value under US principles; a recent arm's-length funding round, adjusted for share class, is usually the starting point. Every figure is then converted to dollars at the spot rate on the taxing date.

Basis and holding period

US basis equals the amount paid plus the income recognised. The holding period for long-term capital gain treatment begins when the shares vest or, where a valid 83(b) election was made, on the day after transfer. For shares acquired by exercising an option, it begins at exercise.

How does HMRC tax the same award?

Are you an office-holder or a self-employed consultant?

The UK analysis starts with status, and it is more consequential than on the US side. A director, including a non-executive director, holds an office, and income from an office is taxed as employment income. An adviser who holds no office and provides services under a consultancy agreement in the course of their own business is self-employed. Titles are not decisive: an adviser who attends board meetings and behaves as a director may be treated as one.

Office-holders: the employment-related securities regime

Where the company makes shares or options available to a director, UK legislation deems them to be acquired by reason of the office. A 2023 Supreme Court decision confirmed that this deeming rule applies whatever the company's actual motive, including where options originated as payment for consultancy services. The consequences are:

• Shares: employment income equal to market value less any price paid, on acquisition. Where shares are forfeitable and the restriction will lift within five years, the default is no charge on acquisition and a charge when the forfeiture restriction lifts, unless an election is made to be taxed up front.
• Restricted securities more generally: the adviser and the company may jointly sign a section 431 election within 14 days of acquisition to be taxed on unrestricted market value at the outset. It is retained by the parties and not sent to HMRC. Whether one was signed determines how later events are reported.
• Options: no charge at grant in most cases; employment income on exercise, measured by the gain.
• Collection: if the shares are readily convertible assets, the company must operate PAYE and Class 1 National Insurance. If not, the income is reported by the individual through Self Assessment. HMRC's helpsheet HS305 covers the computation.

Self-employed consultants: shares as a trading receipt

An adviser with no office who is paid in shares has received consideration in money's worth for services. The market value of the shares is a receipt of the consultancy trade and is included in the profits reported on the self-employment pages of the Self Assessment return, with Class 4 National Insurance applying to those profits. The year in which the receipt falls depends on the terms of the engagement and the accounting basis used for the business. There is no payroll, no P60 and no automatic prompt; the figure appears on the return only if the adviser puts it there.

How does UK valuation differ?

UK market value is defined by UK tax legislation, and a private company valuation prepared on that footing commonly takes account of minority discounts and restrictions in a way that produces a lower figure than a US fair market value for the same shares. Where a UK company has agreed or prepared a valuation for its staff awards, that is the natural reference point. Where a US company has only a 409A valuation, that report is usually the best available evidence for the UK return too, converted to sterling at the rate on the UK taxing date.

The company's ERS reporting

A company that issues shares or options to directors or employees must register the arrangement with HMRC and file an annual employment-related securities return by 6 July following the end of the tax year. That obligation rests on the company, including an overseas company with a UK-based director. For the adviser, the practical point is consistency: the value and date the company reports should match the personal return, and where they do not, the difference should be understood before either is filed.

Capital gains tax on a later sale

On disposal, a UK resident is subject to capital gains tax on the proceeds less the base cost. The base cost is broadly the sterling amount already charged to income tax plus any price paid. Where no income was ever reported, the base cost position is weaker and the earlier year needs to be addressed before the gain can be computed with confidence.

US vs UK treatment of advisory shares at a glance

Where do the US and UK treatments mismatch?

The foreign tax credit is the mechanism that prevents the same income being taxed twice, and it only works cleanly when the two countries tax the same amount in the same period. With advisory equity they rarely do.

Different taxing dates

An 83(b) election accelerates US income to the grant date. If the UK charge arises later, when forfeiture restrictions lift, the UK tax is paid in a year with no matching US income. The reverse occurs where the UK taxes on acquisition and the US taxes each vesting tranche over the following years. Unused foreign tax credits can generally be carried back one year and forward ten, within the same category of income, so the mismatch is manageable, but only if each year's return tracks it.

Different values

A US fair market value and a UK market value for the same share on the same day can differ materially. Each return carries its own figure, and each country's later gain is computed from its own starting point.

Income in one country, gain in the other

Growth in value between grant and vesting is ordinary income in the US without an 83(b) election, yet may be capital gain in the UK where the charge was taken up front, or the other way round. Credits for tax on capital gains and credits for tax on compensation sit in different foreign tax credit categories and cannot be pooled, so the character on each side must be identified before credits are claimed.

Sourcing where services are performed in the UK for a US company

Compensation for services is sourced where the services are physically performed, not where the payer is incorporated. An adviser who works from London for a US start-up has foreign-source income, and UK tax on it is creditable. If part of the work is performed on trips to the US, the award must be apportioned, normally by workdays over the vesting period, and the US-source portion will not absorb UK tax in the same way. Gains on a later sale raise a separate sourcing question that relies on the US-UK treaty, and the 3.8% net investment income tax may apply to the gain regardless.

How is the award reported in practice? A worked sequence

Take an American resident in London who receives restricted shares in a US company vesting monthly over two years, with no directorship, and performs all services from the UK. The return-preparation sequence is:

1. Establish the documents: adviser agreement, share purchase or grant agreement, vesting schedule, and any 83(b) election with proof of filing.
2. Fix the US taxing dates: the transfer date if an election was made; otherwise each monthly vesting date.
3. Value each event: the 409A valuation in force on each date, converted at that day's exchange rate.
4. Report the US income: on Schedule C, with Schedule SE addressed by reference to the totalization certificate.
5. Determine UK status: no office, so a trading receipt; identify the UK tax year in which each amount falls.
6. Report the UK income: on the self-employment pages at sterling market value.
7. Match the credits: allocate UK tax to the corresponding US year and category on Form 1116, recording carryovers.
8. Record basis: a dollar basis schedule and a sterling base cost schedule, tranche by tranche, for use on the eventual sale.

Had the same adviser been appointed a non-executive director, steps five and six would change entirely on the UK side while the US reporting stayed the same. That asymmetry is why both returns are best prepared together by US-UK tax accountants working from one set of facts.

Which US information forms apply to advisory shares?

• Form 8938: shares in a non-US company held directly are specified foreign financial assets. For taxpayers living abroad, the filing thresholds begin at $200,000 at year end or $300,000 at any time for single filers, and double for joint filers. See the IRS page for Form 8938. Shares in US companies are not reportable.
• FBAR: directly held shares are not a financial account. Shares held in a UK nominee or brokerage account are, and the account counts towards the $10,000 aggregate threshold. Our FBAR penalty calculator illustrates the exposure where accounts were missed.
• Form 8621: an early-stage non-US company can be a passive foreign investment company where, broadly, 75% or more of its gross income is passive or 50% or more of its assets produce passive income. A newly funded company holding mainly cash is the typical case. Status is tested annually and depends on the company's own figures.
• Form 5471: relevant only where the adviser reaches a 10% holding or is an officer or director of a foreign company in which US persons acquire significant stakes; unusual for a typical advisory grant but checked on every file.

What if advisory shares received years ago were never reported?

This is the most common way the issue reaches us. An adviser accepted shares in several companies over a decade, received no tax forms, and the first reportable event anyone noticed was a sale. By then, there are several distinct problems:

• Income at vesting or acquisition was omitted from one or both returns.
• No basis was established, so the sale appears to be all gain.
• Form 8938, and possibly Form 8621, were not filed for the years the shares were held.
• UK Self Assessment may never have been filed at all if the adviser's other income was taxed through PAYE.

On the US side, a UK-resident taxpayer whose omissions were non-wilful will often qualify for the Streamlined Foreign Offshore Procedures: three years of amended or delinquent returns, six years of FBARs and a signed certification of non-wilful conduct, with no offshore penalty for those who meet the non-residency test. Our IRS streamlined filing team prepares these submissions. Income that arose in years before the three-year window still matters, because it determines the basis used in the years that are filed.

On the UK side, the route is a voluntary disclosure to HMRC covering the years still open to assessment. The ordinary window is four years, extending to six for careless errors and twenty for deliberate ones, with longer periods for certain offshore matters. Tax, interest and a penalty that reflects behaviour and the quality of the disclosure are then settled. Our UK tax services and US tax services teams coordinate the two filings so that UK tax paid late is still claimed as a credit in the correct US year.

Two limits are worth stating plainly. A section 83(b) election that was not filed within 30 days cannot be created retrospectively; the returns are prepared on the vesting-date basis. And where no contemporaneous valuation exists, values have to be reconstructed from funding rounds and company records, with the method documented in the file.

What records should an adviser gather before the returns are prepared?

• Every adviser, consultancy or director appointment letter, with dates.
• Grant agreements, share certificates, option agreements and exercise notices.
• Vesting schedules and any leaver or acceleration events.
• Section 83(b) elections with proof of posting, and any section 431 elections.
• Company valuations and the dates and prices of funding rounds.
• Any Form 1099-NEC, payroll records or ERS confirmations from the companies.
• A log of where services were performed, particularly days spent working in the US.
• The certificate of coverage under the totalization agreement, or the National Insurance record supporting an application for one.

Speak to accountants who prepare both returns

Equity received for services is easy to overlook and difficult to reconstruct, and the US and UK each expect it to be reported on their own terms. Jungle Tax prepares US and UK returns side by side for advisers, non-executives and founders, including multi-year catch-up filings where awards were never declared. For a confidential conversation about your position, contact our cross-border team and we will set out exactly what needs to be filed, for which years, and in what order.