Accountants for US and UK: Section 280G on a UK Company Sale

When a US buyer acquires your UK company, section 280G of the Internal Revenue Code can reach your deal bonuses, accelerated vesting and enhanced severance if you are a US taxpayer. Payments at or above three times your base amount can trigger a 20% US excise tax on the excess, which UK income tax does not reduce or offset.

For US-citizen founders and senior executives of UK companies, the sale is often the largest tax event of a career, and it is reported in two countries at once. Specialist Accountants for US and UK preparing these returns see the same pattern again and again: the UK side is handled well through payroll, while the US side of the change-of-control payments is either missed or reported as if it were ordinary wages. This guide explains how the golden parachute rules work, why they can reach a UK company, how the payments are taxed in the UK, and how Jungle Tax prepares and documents the deal-year returns on both sides of the Atlantic, including when the excise was missed.

This is a guide to preparation and compliance, not to structuring a deal. The calculations under section 280G depend on the facts, and anything listed below as needing verification should be confirmed against the deal documents and the regulations before a return is filed.

What is section 280G, and why does it matter to a UK founder?

Section 280G and its companion, section 4999, are known as the golden parachute rules. They apply to payments "in the nature of compensation" that are contingent on a change in the ownership or effective control of a corporation, or in the ownership of a substantial portion of its assets. The rules work as a pair:

• Section 280G denies the paying corporation a US federal income tax deduction for any excess parachute payment.
• Section 4999 imposes a 20% excise tax on the individual who receives the excess parachute payment. This is on top of ordinary US federal income tax.

Most commentary is written for US boardrooms, where the lost deduction gets as much attention as the excise. For a UK company acquired by a US buyer, the balance is different. A UK trading company usually has little or no US taxable income, so a lost US deduction may cost the payer nothing at all. The individual excise is what still bites, and it falls on the person, not the company. If you are a US citizen or US green card holder working for a UK company, you are taxed by the US on your worldwide income, so the excise can apply to you even though the employer, the payroll and the whole transaction look British.

Can section 280G apply when the target is a UK company?

Generally, yes. Most advisers read the regulations as treating a foreign entity that is classed as a corporation for US tax purposes as a "corporation" for section 280G purposes, and the rules test the individual, not the employer's country of incorporation. A sale of a UK private limited company to a US acquirer, or even a sale between two non-US groups, can raise section 280G questions if one or more of the people paid are US taxpayers. The exact scope, including how the regulations define a corporation, how the change in control is measured through a group, and which entity is treated as the payer, should be verified for your transaction. Practitioner commentary is not uniform on every point.

Who is a "disqualified individual"?

The rules only reach payments to disqualified individuals. Broadly, during a twelve-month look-back period before the change in control, these are people who are:

• Officers, decided on the facts and circumstances, not by job title alone.
• Shareholders owning more than 1% of the fair market value of the corporation's stock, after the attribution rules.
• Highly compensated individuals, meaning the highest-paid 1% of employees, or the highest-paid 250 if that is fewer, with a minimum compensation level that is indexed each year.

A UK founder who is also a director and a significant shareholder will usually fall into more than one of these groups. Non-executive directors, contractors and former employees can also be disqualified individuals, which is easy to miss when the UK side treats them quite differently.

How the 3x safe harbour and the base amount work

The mechanics are counter-intuitive, and they are where most of the errors happen.

Step 1: Establish the base amount

Your base amount is broadly your average annual compensation that was includible in US gross income over the five most recent taxable years ending before the date of the change in control. If you have worked for the company for less time, a shorter period is used, and a partial year is annualised. For US-citizen executives working in the UK, this is a common problem. It is based on compensation includible in US gross income. Where earlier years were never filed, or were filed using the foreign earned income exclusion, you need to confirm what counts in the base. How excluded income is treated in the base amount is a technical point to verify, not assume.

Step 2: Total the parachute payments

Parachute payments can include transaction bonuses, retention payments conditional on the deal, cash severance, pay in lieu of notice that is linked to the change of control, continued benefits, and the value of accelerated vesting of options or restricted shares. For accelerated vesting, the regulations do not always count the full value of the award. Often only the part that reflects the acceleration, plus a factor for lapse of the service condition, is counted. This valuation should be recalculated from the award terms rather than taken from a payroll figure.

Step 3: Apply the 3x test

If the total present value of the parachute payments is less than three times the base amount, there is no excess parachute payment. If it equals or exceeds three times the base amount, the excess parachute payment is everything above one times the base amount, not everything above three times. That "cliff" is the feature most often misunderstood. One pound or dollar over the threshold can expose nearly two-thirds of the package to the 20% excise.

Illustration (units, not a real case)	Below threshold	Just over threshold
Base amount	100	100
3x safe harbour threshold	300	300
Total parachute payments	299	300
Excess parachute payment	0	200 (300 minus 1x base)
Section 4999 excise at 20%	0	40

Payments that can be shown by clear and convincing evidence to be reasonable compensation for services, particularly services after the change in control, can reduce the excess parachute payment. Documenting this is fact-heavy work that is normally done at the time of the deal. As preparers, we check that any such position is supported in the file before the return relies on it.

The private-company shareholder approval exemption

Many UK targets are private companies, and this matters. Section 280G contains an exemption for corporations whose stock is not readily tradeable on an established securities market. Payments are exempt if, after adequate disclosure of all material facts to every shareholder entitled to vote, they are approved by more than 75% of the voting power of the outstanding stock. Shares held by the disqualified individuals receiving the payments are generally excluded from that vote. In practice, the affected individual usually waives the payments above the safe harbour first, so the vote genuinely decides whether they are paid.

Some points about the approval process matter when we prepare the individual's return:

• A valid vote generally has to take place before the change in control, and the waiver has to be irrevocable before the vote.
• If the vote fails, the waived amounts should not be paid. If they are paid anyway, the exemption is not available.
• A separate exemption for small business corporations refers to the US S corporation eligibility rules. Whether a UK limited company can ever qualify for it is doubtful and should be confirmed with the deal lawyers, not assumed.
• Whether the target's shares, or those of a UK parent, count as "readily tradeable" depends on the group structure and any listing. Check this if any company in the chain is listed.

When a UK private company is sold, the shareholder vote is sometimes left out because the UK lawyers do not know about it, or because nobody on the sell side realised a US taxpayer was among the executives. When that happens, the excise does not go away. It becomes a return-preparation problem.

How the same payments are taxed in the UK

The UK has no equivalent of the golden parachute excise. For a UK-resident employee, change-of-control payments are taxed under the Income Tax (Earnings and Pensions) Act 2003 (ITEPA) as income, usually through PAYE, and the only question is which charging provision applies.

• Transaction and retention bonuses are usually general earnings under section 62 ITEPA, liable to income tax at your marginal rate and Class 1 National Insurance through payroll.
• Genuine termination payments can fall under section 401 ITEPA, where the first £30,000 is generally exempt from income tax. Post-employment notice pay is now taxed as earnings, and termination awards above £30,000 carry employer Class 1A NIC (see HMRC's Employment Income Manual on the section 401 £30,000 threshold).
• Accelerated vesting of share options and awards is taxed under the employment-related securities rules. The treatment depends on whether the award is a tax-advantaged scheme, whether the shares are readily convertible assets (which brings in PAYE and NIC), and whether elections were made on acquisition.
• Sale proceeds for founder shares are normally a capital gains matter in the UK. However, if a share price is enhanced because of employment, part of it can be treated as income.

The practical point for a dual filer is that the UK classification and the US classification are two separate questions. A payment that qualifies for the UK's £30,000 termination exemption can still be a parachute payment for US purposes. A payment that is capital in the UK because it forms part of the price for your shares will usually not be a parachute payment for US purposes, but only if the documents support its being consideration for stock rather than disguised compensation. For more on how the UK and US treat an exit side by side, see our pages for US-UK tax accountants for founders and US-UK tax accountants for executives.

US vs UK treatment of change-of-control payments

Issue	United States (US citizen or green card holder)	United Kingdom (UK-resident employee)
Basis of taxation	Worldwide income, whatever the country of residence	UK residents on worldwide income, under the post-2025 residence-based rules
Transaction bonus	Ordinary wage income, and potentially a parachute payment	General earnings under s.62 ITEPA, through PAYE and Class 1 NIC
Enhanced severance	Ordinary income, and potentially a parachute payment	May fall under s.401 ITEPA, with the first £30,000 generally exempt
Accelerated vesting	Income when vested or exercised, with the acceleration value potentially a parachute payment	Employment-related securities rules, with PAYE and NIC if readily convertible
Special penalty tax	20% excise under s.4999 on the excess parachute payment	None: the UK has no parachute excise
Employer consequence	Lost US deduction under s.280G (often immaterial for a UK payer)	Normal corporation tax deduction rules apply
Double tax relief	Foreign tax credit against US income tax only	Credit for US tax on the same income only where the UK has the secondary taxing right

Why UK tax does not reduce the 4999 excise

This is the question our clients ask most often, and it is the one most generalist pages leave out. The foreign tax credit, claimed on Form 1116, is a credit against US income tax under chapter 1 of the Internal Revenue Code. The golden parachute excise is imposed separately, under chapter 46. So UK income tax and NIC paid on the bonus can offset the ordinary US income tax on that income, but they cannot offset the 20% excise.

The US-UK income tax treaty does not solve this either. It is built to relieve double income tax, and its foreign tax credit article works through the US domestic credit rules. Whether the treaty covers the excise at all is a question to verify on the facts. In most cases the practical outcome is the same: the excise is a net additional US cost. For a UK-resident executive whose UK rates are high enough that the foreign tax credit wipes out their US income tax, the excise may be the only US tax payable on the deal-year compensation, and that is why it gets missed.

Sourcing the payments to UK workdays for Form 1116

To claim the foreign tax credit against the ordinary US income tax, each payment has to be sourced. Compensation for services is generally sourced where the services were performed. For multi-year awards such as bonuses and equity, the US rules generally allocate by workdays over the period to which the compensation relates. A founder who spent time in the US negotiating the deal, or who worked partly from a US office, may have part of the bonus or vesting value sourced to the US. That part produces no foreign source income for the credit, even though the UK taxed all of it.

Preparing this correctly means:

• Rebuilding a workday calendar for the vesting or earning period of each award, split between the UK, the US and any other countries.
• Putting the income in the general category for Form 1116, and matching the UK tax to it, using the correct UK tax year to US calendar year allocation.
• Converting at the appropriate exchange rates and keeping the P60, P11D, final payslips, share plan statements and the completion documents in the file.
• Checking whether the UK taxed any US-sourced portion, and whether the UK should give relief for US tax on that portion instead. This is a tie-break question that affects both returns.

The IRS guidance on Form 1116 and the foreign tax credit sets out the general framework. The sourcing of each award has to be done from your own data.

How the deal-year returns are prepared

The US return

The excise under section 4999 is reported on the individual's Form 1040, through Schedule 2, as an additional tax. When a US employer runs the payroll, it generally withholds the excise and reports the excess parachute payment on Form W-2. A UK employer running UK payroll usually does neither. There is normally no W-2, no US withholding and no US reporting code, so the individual has to calculate and report the excise personally. The IRS explains the income treatment of employee compensation in Publication 525. Our US preparation file for a change-of-control year normally contains:

1. The base-period compensation history, reconciled to the US returns actually filed for those years.
2. A schedule of every contingent payment, with the regulatory valuation of any accelerated vesting.
3. The 3x test, the excess parachute payment and the excise calculation, with any reasonable-compensation reduction supported by documents.
4. Evidence of any 75% shareholder vote, including the disclosure document and the waiver, where the exemption is relied on.
5. The workday sourcing and Form 1116 workings.
6. Estimated tax payments, or an extension payment, to limit underpayment penalties. With no withholding, the excise is often paid late unless someone plans for it.

The deal year is also when US information reporting often grows. Sale proceeds held in UK accounts, escrow or holdback balances, and new holdings of acquirer shares through a foreign broker can all affect FBAR and Form 8938 thresholds. If you held shares in, or control of, UK companies, earlier years may raise Form 5471 questions as well.

The UK return

On the UK side, the Self Assessment return for the tax year of completion reports the employment income from the P60 and P11D, any employment-related securities income, the termination payment analysis, and capital gains on the share sale. If the transaction proceeds were paid into a US escrow or in acquirer stock, the timing and valuation for UK purposes must be recorded. A UK-resident taxpayer normally cannot claim UK credit for the US excise, because the UK is the primary taxing country on UK-performed employment income. The excise is generally a final US cost, not a UK relief. See our UK tax services page for more on the Self Assessment side.

What if the golden parachute excise was missed?

It happens more than you might expect, especially when the UK payroll was flawless and the US return was prepared on the assumption that the foreign tax credit covers everything. If you received change-of-control payments in an earlier year and no section 280G analysis was done, the route is usually:

• Reconstruct the analysis from the purchase agreement, bonus letters, award agreements and any shareholder vote materials.
• Quantify the exposure, including interest and possible penalties, and check whether the shareholder approval exemption was properly obtained.
• Amend the affected year on Form 1040-X, adding the excise and correcting any foreign tax credit or sourcing errors at the same time.
• Consider the wider picture. If the deal also revealed unfiled years, unreported UK accounts or missed information returns, an amendment may not be enough on its own. The IRS streamlined procedures, including the Streamlined Foreign Offshore Procedures for eligible non-residents, are designed for non-wilful failures to file returns and FBARs. Whether the excise can be dealt with within that route should be discussed before filing. Our IRS streamlined filing experts can assess eligibility, and the FBAR penalty calculator gives a first view of any reporting exposure.

Mistakes rarely stay in one tax. A missed excise often goes with incorrectly sourced foreign tax credits, and sometimes with unfiled FBARs for the account where the proceeds landed. Fixing all of them together, in one consistent filing, is nearly always cleaner than dealing with them one at a time.

A practical checklist for the deal year

• Confirm your US tax status on the change-in-control date: citizen, green card holder, or substantial presence.
• Get the complete schedule of contingent payments, including equity, from the completion documents, not just the payslip.
• Reconcile five years of US-includible compensation for the base amount.
• Establish whether a 75% shareholder vote and waiver were obtained before completion.
• Calculate the 3x test on present values, and record every assumption.
• Build the workday sourcing for each award and complete Form 1116.
• Match the UK tax year figures to the US calendar year, at documented exchange rates.
• Pay estimated US tax or an extension payment for the excise.
• Review FBAR, Form 8938 and any Form 5471 obligations arising from the proceeds and holdings.
• File the UK Self Assessment return with the employment-related securities and termination analysis.

Why specialist cross-border preparation matters here

Section 280G is usually handled by US deal lawyers at the corporate level, and UK payroll is handled by UK advisers at the employer level. The individual US-citizen founder or executive sits between the two, and it is often nobody's job to prepare that person's two personal returns so they are consistent. That is the gap we fill. For high-value exits we also work with the client's own legal advisers so the returns match the deal documents. Our high-net-worth team prepares returns and compliance catch-up filings. We do not advise on how the deal is structured.

If you are a US taxpayer who has received, or is about to receive, change-of-control payments from a UK company bought by a US acquirer, or if you think a golden parachute excise was missed in an earlier year, contact our cross-border team for a confidential consultation. We will review the deal documents, establish your exposure on both sides of the Atlantic, and prepare US and UK returns that stand up to scrutiny from the IRS and HMRC.