Accountants for US and UK: Growth Shares Held by Americans

Growth shares awarded by a UK private company to a US citizen are taxed twice over in principle: HMRC applies the employment-related securities rules and the s431 election, while the IRS applies Section 83 and the 30-day 83(b) election. Aligning both, filing the company's ERS return, and reporting any Form 5471 or 8938 exposure keeps the award clean through exit.

For an American executive or co-founder of a UK business, the award letter is usually the easy part. The hard part is that two tax systems look at the same share on different days, at different values and through different rules. Specialist Accountants for US and UK spend most of their time on this kind of award reconciling those two views: what HMRC says was received and when, what the IRS says was received and when, and whether the returns already filed on both sides actually match. This guide works through the UK rules, the US rules, the points where they diverge, the reporting that follows the holder for years, and how to repair prior returns when an election or a form was missed. At Jungle Tax we prepare returns and fix compliance. We do not design share schemes, and nothing here is scheme design advice.

What are growth shares, and why do they cause problems for Americans?

Growth shares (also called hurdle shares or flowering shares) are a separate class of share that only takes part in value above a set threshold, the hurdle. The hurdle is usually set at or above the company's current equity value. Below it, the growth shares get nothing on a sale or winding up, and above it they share in the excess. Because the holder only benefits from future growth, the shares are worth relatively little on the day they are issued. That low starting value is the whole commercial point: the executive pays, or is taxed on, a small amount now, and later growth is meant to be taxed as a capital gain.

A UK-resident British executive has one system to satisfy. A US citizen has two, because the United States taxes its citizens on worldwide income wherever they live. The problems come from three mismatches:

• Timing. The UK may tax at acquisition (with a s431 election) while the US taxes at vesting (without an 83(b) election), or the other way round. When the two countries tax in different years, the foreign tax credit may not fall in the year the US tax is due.
• Value. HMRC works from unrestricted market value (UMV). The IRS works from fair market value under Section 83, which ignores lapse restrictions but may not treat every UK share right the same way. The two figures are not automatically the same.
• Character. An amount that is capital in one country can be ordinary compensation income in the other, which moves it into a different foreign tax credit basket or a different rate band.

The UK side: employment-related securities and restricted securities

Why growth shares are employment-related securities

Shares acquired "by reason of employment" are employment-related securities (ERS) under Part 7 of the Income Tax (Earnings and Pensions) Act 2003 (ITEPA 2003). The test is broad. A right or opportunity to acquire shares made available by a person's employer, or by someone connected with the employer, is treated as made available by reason of employment. For a co-founder who is also a director, HMRC usually treats later share awards as ERS even when the individual argues they were acquired as a founder or investor. The only exception is narrow: shares acquired in the normal course of family or personal relationships.

Restricted securities and the two market values

Most growth shares carry good-leaver and bad-leaver provisions, compulsory transfer rights or vesting conditions. These usually make them "restricted securities" under ITEPA 2003 Part 7 Chapter 2. The restricted securities rules use two values:

• Actual market value (AMV): the value taking the restrictions into account.
• Unrestricted market value (UMV): the value as if the restrictions did not exist.

Without an election, the income tax charge on acquisition is based on AMV less the amount paid. Then, each time a restriction is lifted or varied, or the shares are sold while still restricted, a further income tax charge arises on a proportion of the value at that point. For a successful growth share that later charge can be very large, because it applies to value that has built up since the award. HMRC's internal manual sets out the mechanics in its Employment-Related Securities Manual.

The hurdle is not the same thing as a restriction

This is a point many summaries get wrong. The hurdle is normally a right that belongs to the share class. It is part of what the share is, not a restriction on it. So the hurdle reduces the UMV itself, and that is why growth shares can have a low UMV even when there are no restrictions at all. Leaver provisions and forfeiture terms are restrictions. They create the gap between AMV and UMV. A properly supported valuation deals with both: first the value of the growth share as a class with its hurdle, then the discount for restrictions (which a s431 election removes from the calculation).

The s431 election and its 14-day window

A section 431 election is a joint election by employer and employee. It treats the shares as if the restrictions did not exist for tax purposes. It must be signed within 14 days of acquisition. It is not sent to HMRC. The company keeps it and confirms it on the ERS return. With a full election, the acquisition charge is based on UMV less the amount paid, and no further Chapter 2 charge arises when restrictions lift. Future growth is then within capital gains tax. When the executive pays the full UMV in cash, the acquisition charge is nil and the election simply protects the future growth.

There is no statutory route to make a late s431 election. If it was missed, the Chapter 2 charges apply. The fix is to report those charges correctly when they arise, not to try to backdate the paperwork.

Other ERS charges that can catch growth shares

• Acquisition at undervalue (Chapter 3C): if the shares are acquired for less than market value, or partly paid, a notional interest-free loan can arise and be taxed as a benefit until it is repaid.
• Artificially depressed or enhanced value (Chapters 3A and 3B): arrangements that move value between share classes, such as a later cut in the hurdle, can trigger further charges. This applies even where a s431 election was made.
• Disposal for more than market value (Chapter 3D): relevant when a buyer pays a premium to management shareholders.

PAYE, National Insurance and readily convertible assets

Where the shares are "readily convertible assets" (for example because a trading arrangement exists or a sale is in contemplation), any employment income charge goes through PAYE. Employee and employer National Insurance then apply. The employer rate has been 15% since 6 April 2025. Where the shares are not readily convertible, the executive reports the income on their Self Assessment return. For a US citizen, that UK return has to match the US return, which is covered below.

The company's ERS annual return (formerly Form 42)

Form 42 was replaced by an online Employment-Related Securities return. Any UK company whose employees or directors acquire, or have reportable events on, employment-related securities must register the arrangement with HMRC and file an ERS return by 6 July after the end of the tax year. Growth share awards, s431 elections, restriction lifts and disposals are all reportable. Late filing brings automatic penalties that rise the longer the return is outstanding, and HMRC can charge penalties for inaccurate returns. HMRC's guidance on how to tell HMRC about employment-related securities sets out the registration and filing process. The ERS return is the company's obligation, not the individual's. Even so, it is the first document HMRC will compare with the executive's own Self Assessment return, so the two must agree.

The US side: Section 83 and the 83(b) election from abroad

How Section 83 sees a growth share

Section 83 of the Internal Revenue Code taxes property transferred in connection with the performance of services. If the growth shares are "substantially nonvested", meaning they are subject to a substantial risk of forfeiture (typically a bad-leaver clause that takes the shares back at below value if the executive leaves early) and are non-transferable, then without an election US tax is deferred until vesting. At vesting, the executive has ordinary compensation income equal to the fair market value at that date less the amount paid. For a growth share that has done its job, that can be most of the value, taxed at ordinary rates rather than capital gains rates.

If the shares are fully vested when issued (no substantial risk of forfeiture), Section 83(a) taxes the spread immediately and 83(b) does not apply. In practice many advisers file a protective 83(b) election where it is unclear whether the leaver provisions amount to a substantial risk of forfeiture.

The 83(b) election: 30 days, no extensions

An 83(b) election lets the holder include the value of the shares, less any amount paid, in income in the year of transfer, even though the shares are not yet vested. Growth later is then capital gain, and the capital gains holding period starts at the transfer date. The election must be filed with the IRS within 30 days of the transfer. The 30 days are set by statute. The IRS cannot extend them, and there is no late-election relief. A copy must go to the employer. The IRS publishes an optional standard form, Form 15620, though a compliant signed statement is equally valid.

For an American in London, the practical points are:

• The 30 days run from the date the shares are issued to the executive, not from the date the board minutes are circulated or the share certificate arrives.
• Posting from the UK is slow. Use a tracked international courier and keep proof of the dispatch date. For couriers, the timely-mailing rules only apply to IRS-designated private delivery services, so choose the service carefully.
• The election is filed with the IRS service centre where the executive files their return. Expats usually file with the Austin service centre, but confirm the current address before sending.
• Since 2016, a copy of the election no longer has to be attached to the Form 1040. Keep the stamped copy and courier proof permanently, because the IRS may ask for them at exit, possibly a decade later.
• An election showing zero income (because the executive paid full value) is still worth filing. It fixes the holding period and removes any vesting charge.

Fair market value under Section 83 versus UMV

US valuation ignores "lapse" restrictions (those that will expire) and takes account only of permanent "non-lapse" restrictions. That is conceptually close to UMV, but the two are not identical. Growth shares are often valued with an option-pricing or hurdle-adjusted method. A US examiner may test whether the hurdle, a share right under UK company law, supports the low value claimed. Where a UK valuation has been prepared for the ERS return or agreed informally with HMRC, the US return should normally use a consistent figure and document why it is the fair market value under Section 83. Where the two values differ, the difference should be deliberate and explained, not accidental.

How the UK and US treatments line up: a comparison

Issue	United Kingdom (HMRC)	United States (IRS)
Governing rules	ITEPA 2003 Part 7 (employment-related securities)	Internal Revenue Code Section 83
Election	s431 joint election with employer	83(b) election by the individual
Deadline	14 days from acquisition	30 days from transfer
Filed with	Kept by company; confirmed on ERS return	Filed with the IRS; copy to employer
Late election	No statutory relief	No extension; statutory deadline
Value used at award	UMV (with election) less amount paid	Fair market value ignoring lapse restrictions, less amount paid
No election	Income tax on lifting of restrictions (proportionate charge)	Ordinary income at vesting on full spread
Company reporting	ERS online return by 6 July	None for the award itself; Form 5471 may apply to the holder
Exit	Capital gains tax; Business Asset Disposal Relief if conditions met	Long-term capital gain if held over one year; NIIT may apply
Holding period	Generally irrelevant to rate	From transfer (with 83(b)) or vesting (without)

Which combination of elections produces a clean cross-border position?

From a return-preparation point of view there are four combinations. Each leaves a different trail to report.

Both elections made

This is the most aligned result. Both countries tax, if at all, in the award year and on broadly similar values. At exit, both treat the growth as capital gain. The UK typically taxes the award-year income first as the country of residence and where the work was done, and the US allows a foreign tax credit against the same compensation income. Returns are straightforward if the values used match.

s431 only

The UK taxes at award, but the US taxes at vesting on a much larger spread. The UK may treat the later vesting as a non-event, so there may be no UK tax to credit against a potentially large US compensation charge in the vesting year. The UK tax paid at award may also fall into a year with no matching US income, though it can be carried back one year or forward ten years under the foreign tax credit rules. This is the combination most likely to leave real US tax to pay.

83(b) only

The US taxes at award, and the UK taxes proportionately when restrictions lift. The UK charge is usually the bigger one, and the US has already treated the growth as capital. The UK income tax then may not match up with US ordinary income. How much of it can be credited, and in which basket, needs careful work.

Neither election

Both countries tax at a later point, but the UK Chapter 2 charge and the US vesting charge do not necessarily fall in the same year or on the same value. This is often manageable if both returns are prepared together, and badly wrong if they are prepared separately.

Basis and holding period: why the two returns will show different gains

In the UK, the CGT base cost is generally the amount paid plus the amount charged to income tax as employment income. In the US, basis is the amount paid plus the amount included in income under Section 83. If the income amounts differ because of timing, value or exchange rate, the gains at exit will differ too. The US also measures everything in dollars. Basis is fixed at the exchange rate on the date of acquisition or vesting, and the sale proceeds are converted on the sale date. A UK gain of £1 million can be a substantially larger or smaller dollar gain depending on sterling's movements over the holding period. Keep a basis schedule for both countries from the day of the award. Reconstructing one at exit, from ten-year-old board papers, is expensive.

The US holding period matters for the rate. Shares held more than one year from the start of the holding period get long-term capital gain rates. Without an 83(b) election the clock starts at vesting, so an exit shortly after vesting can produce short-term gain taxed at ordinary rates. The UK has no equivalent split.

What happens at exit: UK CGT, US capital gain and foreign tax credits

UK capital gains tax

The main CGT rates on shares have been 18% and 24% since 30 October 2024. Business Asset Disposal Relief (BADR) can reduce the rate on up to a lifetime limit of £1 million of qualifying gains. The BADR rate rose to 14% from 6 April 2025 and to 18% from 6 April 2026. To qualify, the holder must generally have been an officer or employee and have held at least 5% of the ordinary share capital, 5% of the voting rights and a 5% economic interest for at least two years before disposal. Growth shares are often non-voting or give only a small share of distributable profits, so many holders do not qualify even when their gain is large. Check this before exit rather than on the return.

US capital gain and the Net Investment Income Tax

For the US, long-term gain is taxed at up to 20%. The 3.8% Net Investment Income Tax (NIIT) may apply on top. UK CGT paid on the same disposal is generally creditable against US tax on the gain. A US citizen living in the UK who pays UK tax on the gain can usually treat the gain as foreign source for credit purposes, under the special sourcing rule for citizens with a foreign tax home or under the treaty's resourcing provisions. Where UK CGT is at 24%, it will often fully cover the US regular tax on the gain. The NIIT is the usual problem. Under the Code it is generally not reduced by foreign tax credits. Treaty-based positions exist, but they are contested and fact-specific, and have to be disclosed on Form 8833 if taken.

Matching the credit to the right income

Credits have to be matched by year, by basket and by item. Compensation income from growth shares taxed at vesting is general category income. A capital gain on sale is usually passive category income, though it can be general category in some cases, for example through the high-tax kick-out. A UK income tax charge on lifting of restrictions in 2029 cannot simply be credited against a US capital gain in 2031. And where the compensation relates partly to work done in the US (for example during a relocation), US tax law sources it by workdays. That can reduce the foreign-source income available to absorb UK tax.

Section 1248 and 10% holders

Where a US person owns 10% or more of the voting power or value of a UK company that is a controlled foreign corporation, Section 1248 can recharacterise part of the gain on sale as a dividend, to the extent of the company's earnings and profits. This affects which basket the income falls into, and it can affect the rate. It matters most for co-founders with significant stakes, and it has to be checked at exit.

Form 5471, Form 8938 and FBAR: the reporting that follows the shares

Form 5471

A US citizen who is an officer or director of a UK company can have a Form 5471 filing requirement even without owning much stock. Category 2 filers are US officers or directors of a foreign corporation in which a US person has acquired 10% or more of the stock. Category 3 filers are US persons who acquire 10% or more of the stock. Category 4 and 5 filers are those who control the company or are 10% US shareholders of a controlled foreign corporation. A co-founder whose ordinary and growth shares together cross 10% of the votes or value is likely to be caught. Control counts US-person ownership, including ownership attributed through family members and entities, so the company can become a CFC through other US holders. The penalty for failing to file is generally $10,000 per form per year, with further penalties if the failure continues after IRS notice. Just as seriously, the assessment period for the whole return can stay open until the form is filed. Where the company is a CFC, the holder may also have income inclusions under Subpart F or GILTI (now net CFC tested income). These are reported with the 5471 and belong in the return-preparation conversation well before exit.

Form 8938

Shares in a foreign company held directly, rather than through a financial account, are specified foreign financial assets for Form 8938. For taxpayers living abroad, the thresholds are $200,000 at year end or $300,000 at any time during the year (single), and $400,000 or $600,000 (married filing jointly). A growth share may be worth very little in year one and hundreds of thousands of dollars after a funding round. The form has to be looked at again every year, using a reasonable estimate of value.

FBAR

Shares held directly on the company register are not a foreign financial account for FBAR. Shares held through a nominee, a UK brokerage account or an employee share platform account may be. Once shares are sold and the proceeds sit in a UK bank account, the FBAR position changes immediately. Our FBAR penalty calculator shows the range of exposure where prior years were missed.

PFIC risk in early-stage companies

A UK trading company is rarely a passive foreign investment company. An early-stage company holding large cash reserves from a funding round, with little revenue, can briefly fail the asset test. Where a holder is also a 10% US shareholder of a CFC, the PFIC rules generally give way to the CFC rules. Smaller holders do not get that protection. The PFIC position should be documented, not assumed.

How do you fix a missed 83(b) election or missed reporting?

A missed 83(b) cannot be filed late

The 30-day deadline is statutory and the IRS will not accept a late 83(b). The compliance question then becomes whether the vesting income has been reported. Many Americans in the UK assume their UK payslip or Self Assessment took care of everything. In fact, the US vesting event can produce compensation income that never appeared on the Form 1040. Where vesting has already happened and was not reported, amended returns (Form 1040-X) are needed. These report the income at the correct fair market value and claim the matching UK tax as a foreign tax credit, or, where appropriate, the foreign earned income exclusion. Corporate steps some companies consider, such as cancelling and re-issuing an award to reset the 30 days, are corporate-law questions for the company's own advisers and carry their own risks. We prepare the returns that follow whatever was actually done.

Missed information returns and income in prior years

Where prior US returns left out vesting income, a capital gain, Form 5471, Form 8938 or FBARs, the route depends on the facts. For a non-wilful US citizen living in the UK, the IRS Streamlined Foreign Offshore Procedures are usually the cleanest route. They cover three years of amended or late returns and six years of FBARs, with no miscellaneous offshore penalty for those who meet the non-residency test. Where all income was reported and only information returns such as Form 5471 were missed, the delinquent international information return procedures with a reasonable-cause statement may be the better fit. Which route fits is decided by the facts, and the choice can affect penalty exposure considerably.

Missed UK reporting

If the company failed to register an arrangement or file an ERS return, the fix is the company's: late registration and filing, with the penalties that come with it. If the executive's own Self Assessment left out a Chapter 2 charge or a disposal, the return can be amended within 12 months of the filing deadline. After that, a disclosure is made to HMRC. Either way, the UK corrections and the US corrections should be prepared together, because every change on one side moves the foreign tax credit on the other.

A return-preparation checklist for American holders of UK growth shares

• Share subscription or award agreement, articles showing the growth share rights and hurdle, and board minutes dating the issue.
• The signed s431 election (if any) and evidence of the date it was signed.
• The filed 83(b) election, a copy with proof of dispatch, and any IRS acknowledgement.
• The valuation supporting UMV and, if different, the US fair market value.
• Copies or confirmation of the company's ERS return entries for each year with a reportable event.
• Capitalisation tables at each year end, to test the Form 5471 categories and CFC status.
• A dual-currency basis and holding period schedule.
• UK Self Assessment returns and US returns for every year from award to exit, prepared or reviewed together.

Holders with wider cross-border affairs will find our high-net-worth tax return service and our US-UK tax accountants page useful for how we coordinate both returns under one engagement.

Why this needs coordinated US and UK return preparation

Most errors on growth share awards are not technical misunderstandings. They happen when the UK return and the US return are prepared by different people, each looking at only one side. The UK preparer sees an award with a s431 election and no further charge. The US preparer sees nothing at all until a vesting date that nobody flagged. Years later, an exit brings a sale agreement, a large gain, a Form 5471 question and a basis nobody can support. Preparing both returns together from the award year onwards is what prevents that. Where it has already happened, a coordinated catch-up across both countries is the most efficient fix.

If you are a US citizen holding growth or hurdle shares in a UK company, or you think an election, an ERS entry or an IRS information return may have been missed, contact our cross-border team for a confidential review. We will reconcile what was filed on both sides, identify any gaps, and prepare the returns needed to put the position right before an exit forces the question.