Accountants for US and UK: American Founder at a London IPO

An American founder of a UK company that floats in London reports the same IPO twice. Shares sold into the offer are taxed in the admission year by both countries, the lock-up defers nothing already sold, and options exercised at admission are payroll income. Specialist Accountants for US and UK returns reconcile the two.

Most published material on flotations is written for one country at a time. UK commentary explains Business Asset Disposal Relief and employment-related securities without a word on dollar basis or Form 5471. US commentary explains PFIC rules and foreign tax credits without noticing that the UK tax year ends on 5 April. A US-citizen founder or early executive sits in the gap between the two, and the IPO year is the one in which that gap is most expensive to get wrong. At Jungle Tax we prepare both sets of returns for exactly this reader, and this guide sets out, event by event, what goes on each return. It is a compliance guide: it describes how transactions that have already happened are reported, not how they should be arranged.

What does an American founder actually report in the IPO year?

A flotation is not one tax event. It is a sequence of five or six, each with its own date, and the two countries do not always agree on which of them matters. A typical sequence for a founder or early executive looks like this:

• Pre-IPO reorganisation – a new holding company is inserted, share classes are collapsed into a single class of ordinary shares, and the shares are subdivided to reach a sensible offer price.
• Option exercises at admission – options that are exercisable only on an exit are exercised immediately before or on admission.
• The primary issue – the company issues new shares to raise capital, diluting every existing holder.
• The secondary sale – existing holders sell part of their holding into the offer.
• The lock-up – the retained shares cannot be sold for a contractual period, commonly six to twelve months.
• Year end – the retained holding, now quoted, is valued for US information reporting, and the founder’s percentage holding may have crossed a filing threshold.

For a UK-resident US citizen, the UK self-assessment return covers 6 April to 5 April and the US Form 1040 covers the calendar year. An admission in September 2026 therefore falls in the UK 2026-27 tax year and the US 2026 tax year, which have different filing dates, different payment dates and different currencies. Every section below comes back to that mismatch.

Side by side: the same IPO on a US and a UK return

Event	US return (IRS)	UK return (HMRC)
Share split or subdivision	Generally no gain; dollar basis and holding period spread over the new shares	Generally no disposal; sterling base cost spread over the new shares
New holding company inserted	Tested independently under US reorganisation rules; Form 926 may be required	Generally treated as no disposal where the share exchange conditions are met
Option exercise at admission	Spread is compensation income under Section 83 unless the option is a US statutory option	Income tax and National Insurance through PAYE on non-tax-advantaged options once shares are readily convertible assets
Secondary sale into the offer	Capital gain in dollars; Form 8949 and Schedule D; up to 20% plus the 3.8% net investment income tax	Capital Gains Tax in sterling at 18% or 24%; Business Asset Disposal Relief at 18% if the conditions are met
Lock-up on retained shares	No deferral and no valuation discount for a restriction that will lapse	No deferral of tax on shares already sold or options already exercised
Payment timing	Quarterly estimated tax in the calendar year of the gain	CGT due 31 January after the tax year ends; not included in payments on account
Year-end reporting	Form 8938, FBAR for custody accounts, Form 5471 or Form 8621 where relevant	Capital gains pages of the self-assessment return; employer files the employment-related securities return

Pre-IPO share reorganisation and share splits

Almost every flotation is preceded by a tidy-up of the share capital. Three steps recur, and each needs a line of analysis on both sides.

Subdivision of shares

A subdivision replaces each existing share with a larger number of shares of smaller nominal value. In the UK this is a reorganisation of share capital: there is no disposal, and the original sterling base cost and acquisition date carry across to the enlarged holding. In the US a pro rata split is likewise not a taxable event; the dollar basis is reallocated across the new shares and the holding period carries over. Nothing is taxed, but the per-share basis used on the later sale must be the post-split figure. Returns that apply a pre-split cost per share to post-split share numbers are a recurring error in IPO years.

Conversion into a single class

Preferred, growth and founder classes are usually converted into one class of ordinary shares before admission. The UK generally treats a conversion within the same company as a reorganisation with no disposal for capital gains purposes, but for an employee or director the employment-related securities rules must also be checked, because a conversion or the lifting of restrictions can be a chargeable event for income tax. The US generally treats a conversion as a recapitalisation, again without gain, provided nothing other than shares is received. Where the conversion ratio shifts value between classes, each country applies its own test and they should not be assumed to agree.

Inserting a new holding company

Where a new UK holding company is placed on top of the group, shareholders exchange their old shares for new ones. The UK generally treats a qualifying share-for-share exchange as no disposal, with the new shares standing in the shoes of the old. That UK result does not transfer to the US return. For a US person the exchange is a transfer of stock to a foreign corporation: it must qualify for non-recognition under US rules in its own right, it is generally reportable on Form 926, and a US transferor who holds five percent or more of the new holding company afterwards generally needs a gain recognition agreement attached to the return to preserve that treatment. Founders routinely learn about this form for the first time when their IPO-year return is being prepared, by which point the document should already have been filed.

The secondary sale: one disposal, two gains

When a founder sells existing shares into the offer, the two countries compute different gains from the same proceeds.

US capital gain with dollar basis

The US gain is computed in dollars. The cost of each lot is translated at the exchange rate when it was acquired, and the proceeds at the rate when the sale is made. A founder who subscribed for shares when sterling was strong and sells when it is weaker has a smaller dollar gain than the sterling gain; the reverse is equally possible. Shares held for more than one year produce long-term gain, taxed at up to 20%, and the 3.8% net investment income tax applies on top for higher earners. Shares acquired by exercising an option at admission and sold the same day are short-term, although the gain is usually small because the basis includes the income recognised on exercise.

If the company was a controlled foreign corporation at any point in the previous five years while the founder was a ten percent US shareholder, part of the gain may be recharacterised as a dividend by reference to the company’s accumulated earnings. That recharacterisation is a return-preparation matter, not an election, and it requires earnings information that the company’s finance team may never have computed on US principles.

UK Capital Gains Tax with sterling base cost

The UK gain is computed in sterling against the pooled base cost of shares of the same class. For disposals in 2026-27 the main rates on shares are 18% within the basic rate band and 24% above it, after an annual exempt amount of £3,000. The disposal date is the date the sale contract becomes unconditional, which in a flotation is normally admission, not the date cash is received and not the end of the lock-up. HMRC’s general guidance on tax when you sell shares covers the pooling rules; the cross-border difficulty is that the pool must be reconstructed in two currencies.

Do the 5 percent tests for Business Asset Disposal Relief survive dilution?

Business Asset Disposal Relief applies a rate of 18% to qualifying disposals made on or after 6 April 2026, up to a lifetime limit of £1 million of gains. For shares that did not come from an Enterprise Management Incentive option, the company must have been the individual’s personal company for at least two years ending with the disposal. That means holding at least 5% of the ordinary share capital and 5% of the voting rights, together with an entitlement to at least 5% of either the distributable profits and assets on a winding up or the proceeds on a sale of the whole company. The individual must also have been an officer or employee throughout, and the company a trading company or holding company of a trading group.

A flotation tests these conditions at the worst possible moment. The primary issue dilutes every holder at admission, and the secondary sale completes at the same time. An executive holding 6% before admission may hold 4.5% once the new shares are issued. Three points matter for the return:

• The order of events. Whether the founder’s sale precedes or follows the issue of new shares is determined by the transaction documents, not by assumption. The return should be prepared from the completion steps as executed.
• The dilution election. Where a holding falls below 5% because the company issues shares for cash for genuine commercial reasons, the holder can elect to be treated as having sold and reacquired the shares at market value immediately beforehand, crystallising the gain to that point with relief, and can make a further election to defer that gain until the shares are actually sold. HMRC’s note on shareholdings diluted below the 5% threshold sets out the mechanism. Both elections carry statutory time limits and are made in or alongside the self-assessment return.
• The US has no equivalent. A UK deemed disposal is not a US realisation event. Where the UK gain is crystallised and not deferred, UK tax arises in a year in which the US recognises no income, and the credit position has to be tracked forward to the year of the real sale.

Shares acquired under an Enterprise Management Incentive option follow a different route: the 5% tests do not apply, and the two-year period runs from the grant of the option. Because the relief now carries the same 18% rate as the lower main rate and only six points less than the higher one, its value on a £1 million gain is modest, but a claim made without the conditions being met is still an incorrect return.

Does a lock-up period defer tax?

No, and this is the most persistent misunderstanding among founders. A lock-up is a contractual promise to the underwriters not to sell retained shares for a period after admission. It has three consequences for the returns and none of them is deferral.

• Shares already sold are taxed in the year of sale. The lock-up applies to what is kept. The gain on shares sold into the offer belongs to the admission year in both countries.
• Options already exercised are taxed at exercise. Under Section 83 the US measures compensation at the value of the shares when they are transferred, disregarding any restriction other than one which by its terms will never lapse. A lock-up lapses, so it neither delays the income nor discounts the value. The UK charge on exercise is similarly unaffected by the fact that the resulting shares cannot yet be sold.
• Retained shares are not taxed until sold, but they are reported. Their quoted value appears on the US information returns for the admission year, and the eventual sale after the lock-up expires is a separate disposal in a later year, with its own exchange rate and its own credit calculation.

The practical result is a founder with a large tax bill in two countries, part of which relates to option shares that could not be sold to fund it. Sell-to-cover arrangements are usually carved out of the lock-up for that reason, and the shares sold under them are themselves disposals to be reported.

Option exercises at admission: PAYE and National Insurance versus Section 83

Shares and options held by a director or employee of a UK company are employment-related securities, including founder shares. Before admission, shares in a private company are often not readily convertible assets, so any income tax on an option exercise is settled through self-assessment and no National Insurance is due. A flotation changes that. HMRC’s manual on the meaning of readily convertible assets confirms that shares capable of being sold on a recognised investment exchange, or for which trading arrangements exist or are likely to come into existence, qualify. Once they do:

• Income tax on the exercise of a non-tax-advantaged option is collected through PAYE, with employee and employer National Insurance.
• The employer must account for PAYE on a best estimate of value, whether or not the employee has sold any shares.
• If the employee does not make good the PAYE to the employer within 90 days after the end of the tax year, a further income tax charge arises on the amount outstanding.
• Where the option agreement passes the employer’s National Insurance to the employee, the amount borne reduces the UK taxable amount, a deduction with no automatic US counterpart.

The US analysis runs on separate tracks. A UK tax-advantaged option is not, without more, a US statutory option. A properly exercised Enterprise Management Incentive option may produce no UK income tax at all, with the whole uplift falling into Capital Gains Tax on sale, while the US taxes the spread at exercise as compensation at ordinary rates. The two countries then tax the same economic profit as different kinds of income, in what may be different years, and the Form 1116 category analysis has to follow the US character of the income, not the UK label on the tax. Restricted shares acquired earlier raise the mirror-image question of whether a Section 83(b) election was filed within 30 days of acquisition; if it was not, the IPO-year return may have to pick up income as restrictions fall away.

Form 8938 valuation once the shares are listed

Shares in a non-US company held directly are a specified foreign financial asset. For a US citizen living abroad, Form 8938 is required when total specified foreign assets exceed $200,000 at year end or $300,000 at any time in the year for a single filer, and $400,000 or $600,000 for joint filers. A founder’s holding in a private company was often reported at a reasonable estimate. After admission that latitude disappears:

• The year-end value is the quoted closing price multiplied by the shares held, converted at the US Treasury’s year-end exchange rate.
• The maximum value during the year must be reported, which for a newly listed share may be well above the year-end figure.
• No discount is taken for the lock-up.
• Shares reported on a Form 5471 filed for the same year are identified on Form 8938 by reference to that form and not valued a second time.

There is a second, quieter change. Before the IPO a founder typically holds shares in their own name on the company’s register, which is not a financial account. On admission the shares are usually moved into a custody or brokerage account. That account is a foreign financial account, reportable on the FBAR once the aggregate of all foreign accounts exceeds $10,000 and reported on Form 8938 as an account in place of the shares inside it. Founders who correctly had no FBAR entry for their shares before admission frequently overlook that they now do; our FBAR penalty calculator shows the exposure for a missed year.

What happens to Form 5471 and PFIC status when the holding falls?

Form 5471 obligations turn on percentage ownership, and an IPO moves the percentages. A US person who owns 10% or more of a foreign corporation by vote or value has filing obligations when that threshold is crossed in either direction, and a US citizen who is an officer or director has a separate obligation in a year in which a US person acquires a 10% interest. Where US shareholders holding 10% or more together own more than 50%, the company is a controlled foreign corporation and annual filing follows, with a $10,000 penalty for each form not filed. The admission-year return should therefore establish:

• the founder’s percentage by vote and by value immediately before and after each step, including attributed holdings of family members and entities;
• whether the company was a controlled foreign corporation for any part of the year, and the date on which it ceased to be;
• whether a final Form 5471 is required for the year in which the founder’s interest falls below 10%;
• whether the reorganisation created a new foreign corporation in which the founder acquired 10% or more.

Falling out of the Form 5471 regime is not the end of the analysis. While a company is a controlled foreign corporation, a ten percent US shareholder is generally shielded from the passive foreign investment company rules for that company. Once the founder drops below 10%, or the company ceases to be controlled, that shield no longer applies to later periods and the company must be tested each year on its own income and assets. An operating business rarely fails the income test, but a company holding substantial IPO proceeds in cash carries more passive assets than it did, and the asset test for a listed company is generally applied by reference to market value. If the company is a PFIC for a year, Form 8621 is added to the return. The conclusion, either way, should be documented each year and not simply carried over from the previous one.

UK payments on account and US estimated tax in a large-gain year

The two countries collect tax on the same gain on entirely different timetables.

United Kingdom

Capital Gains Tax on shares is paid through self-assessment by 31 January following the end of the tax year. For an admission in September 2026 that is 31 January 2028. There is no 60-day return for a sale of shares by a UK resident. Payments on account are each half of the previous year’s income tax and Class 4 National Insurance bill; Capital Gains Tax is left out of that calculation, so a large gain does not inflate the following year’s instalments. Option income is different. Where PAYE was operated at admission the tax has already been collected, but any shortfall between the payroll estimate and the final figure is income tax and does feed into payments on account for the next year.

United States

The US expects tax during the year. A gain realised in September falls into the estimated payment period ending 15 September, with the final instalment due the following 15 January. A taxpayer whose prior-year adjusted gross income exceeded $150,000 avoids an underpayment penalty by paying 110% of the prior year’s tax or 90% of the current year’s. Where income is concentrated late in the year, the annualised income method on Form 2210 matches the required instalments to when the income actually arose. The return preparer needs the admission date, the dollar gain and the expected credit position to compute any of these correctly.

Foreign tax credit timing: when does the UK tax count?

For a UK-resident American the UK has the primary right to tax the gain and the US gives credit. US sourcing rules treat a gain on shares realised by a citizen whose tax home is abroad as foreign source where foreign tax of at least 10% of the gain is actually paid, with the treaty available as a backstop. The difficulty is timing.

Take the September 2026 admission again. The US taxes the gain in 2026. The UK tax on it belongs to the tax year ending 5 April 2027 and is paid in January 2028. A taxpayer claiming credit on the paid basis has a 2028 credit; unused credits carry back only one year, to 2027, and so do not reach 2026 at all. A taxpayer who claims credit on the accrual basis treats the UK tax as accruing when the UK tax year closes, in 2027, from where a one-year carryback does reach 2026, generally by way of an amended return or carryback claim once the figures are final. The accrual basis, once elected, applies to all foreign taxes for all later years. A sale between 1 January and 5 April produces a different pairing of years altogether.

Three further points shape the computation. The gain is in the passive category in most cases, while option income is general category, and credits cannot be moved between the two. Long-term gains taxed at preferential US rates require a rate-differential adjustment on Form 1116 that reduces the foreign-source income in the limitation. And the IRS position is that foreign tax credits do not offset the 3.8% net investment income tax, so a residual US liability of that amount on the gain is the normal outcome and not a sign that the return is wrong. If the UK liability is later adjusted, by a relief claim, an enquiry or a corrected payroll figure, the US credit must be redetermined and the IRS notified.

What if the founder lives in the United States?

A US-resident founder of a UK company reverses the priority. The UK does not generally charge Capital Gains Tax on a non-resident’s sale of shares in a trading company, subject to the temporary non-residence rules for those who left the UK within the previous five years. Option income, however, is sourced to where the work was done over the vesting period, so UK workdays can leave a UK income tax and payroll liability on exercise even for someone who has never been UK resident. The US return then reports the full gain with no UK tax to credit against it, and state tax is added to the federal figure.

Records that make the IPO-year returns possible

Our US-UK tax accountants ask for the same file every time, and assembling it before the year end is far easier than reconstructing it afterwards:

• the cap table immediately before and after each completion step, with dates and times;
• acquisition records for every lot of shares, with sterling cost and the exchange rate on each date;
• option agreements, exercise notices, any Section 83(b) or UK restricted securities elections, and payroll records for the admission month;
• the completion statement for the secondary sale, showing gross proceeds, commissions and settlement date;
• the lock-up agreement and any sell-to-cover instructions;
• prior-year Forms 5471, 8938 and FBARs, and the company’s own analysis of its US classification.

That last item is where problems surface. An IPO is frequently the first time anyone examines whether the founder’s earlier US filings were complete. If Form 5471, Form 8938 or FBARs were missed in earlier years and the omission was non-wilful, the IRS streamlined filing procedures exist to bring those years into compliance, and it is considerably better for that to happen before a return reporting a seven-figure gain is filed than after. Our US tax services and UK tax services teams prepare both returns from a single reconciled set of figures.

A London IPO, reported correctly on both returns

A flotation compresses a decade of share history into a single filing season, in two currencies, under two tax years, with elections that have deadlines and information returns that carry fixed penalties. None of it is exotic, but all of it has to agree. Jungle Tax prepares US and UK returns for founders, executives and early shareholders in the year of a listing and in the lock-up year that follows. To discuss your position in confidence, contact our cross-border team and we will arrange a private consultation with a senior preparer.