Accountants for US and UK: Asset Sale and Form 8594 Guide

When an American sells the trade and assets of a UK business rather than the shares, the IRS requires the price to be allocated across seven asset classes under section 1060 and reported on Form 8594, while HMRC taxes each asset under its own rules. Where a company is the seller, a second layer of tax follows on extraction.

For the Accountants for US and UK filers who prepare both sets of returns, an asset sale is harder to report than a share sale. One contract produces several different kinds of income, in two currencies, across two tax years that do not line up. At Jungle Tax we prepare the US and UK returns for the sale year and for any earlier years that need to be brought up to date. This guide explains what those returns contain. It is about reporting a sale that has happened or is contractually settled. It is not advice on how to structure one.

What is a trade-and-assets sale, and why does the identity of the seller matter?

In a share sale the owner sells the company and the company keeps everything it owns. In a trade-and-assets sale the business itself is sold: stock, plant, premises, contracts, customer relationships and goodwill pass to the buyer, and the seller is left holding cash and whatever was excluded. UK buyers often prefer this route because they do not inherit the history of the selling entity.

For a US person the first question is who the seller is for US tax purposes. That is not always the same as who the seller is for UK purposes. There are two patterns.

Pattern A: a UK limited company sells and then distributes the cash

A UK private limited company is treated by default as a foreign corporation for US purposes. If the American owns more than half of it, it is a controlled foreign corporation and the owner already files Form 5471 each year. The company sells its assets, pays UK corporation tax, and then pays the net cash to the shareholder as a dividend or as a distribution in a winding up. There are two taxable events in each country, and they may fall in different years.

Pattern B: the American is treated as selling the assets directly

This covers a sole trader, a partner in a UK partnership, and an owner whose UK company has an entity classification election in place so that the IRS treats it as disregarded or as a partnership. In each case the US return shows the individual selling inventory, equipment and goodwill personally. Where the business really is unincorporated, the UK sees the same thing. Where a UK company has been elected to be disregarded, the UK still sees a company paying corporation tax and then making a distribution. That mismatch drives most of the difficulty in Pattern B and is covered below.

How does the UK tax a company that sells its trade and assets?

The company prepares a corporation tax return for the accounting period that includes completion. The sale price is apportioned between the assets on a just and reasonable basis, and each category goes into a different part of the computation.

Chargeable gains and intangible fixed assets

Land, buildings and some older goodwill are capital assets, and the company pays corporation tax on the chargeable gain. Goodwill and other intangibles that fall within the corporate intangible fixed assets regime are treated differently. Broadly, that regime applies to intangibles created or acquired from an unrelated party on or after 1 April 2002. A sale of those assets produces an income-type credit, not a chargeable gain. For a company whose business predates April 2002, internally generated goodwill is generally treated as an old-regime asset. Which regime applies has to be established from the company's history before the computation is prepared, because it affects which losses can be set against the profit.

Plant, stock and balancing charges

Plant and machinery on which capital allowances have been claimed is brought into the capital allowances computation at its disposal value. Where that value exceeds the remaining pool, a balancing charge arises and is taxed as trading income. Trading stock sold with the business is brought in as a trading receipt, and work in progress is treated in a similar way. Where the trade ceases in the company on completion, the final-period rules apply and the accounting period ends.

VAT and the transfer of a going concern

Where the conditions are met, the sale of a business as a going concern is outside the scope of VAT, so no VAT is charged on the price. The conditions are set out in HMRC's notice on transferring a business as a going concern. They include that the assets are capable of operating as a business and that the buyer uses them to carry on the same kind of business. VAT has no direct counterpart on the US income tax return, but it affects the figure treated as consideration, so the completion statement needs to be read with it in mind.

Getting the cash out: dividend or liquidation distribution

After the company has paid its tax, the shareholder is taxed again on extraction. A dividend is taxed as income at the dividend rates. A distribution made in the course of a formal winding up is generally treated as a capital receipt for the shares and is taxed under Capital Gains Tax. Business Asset Disposal Relief may be available on that capital distribution if the conditions are met. These include a holding of at least 5 per cent, an office or employment with the company, and the distribution being made within three years of the company ceasing to trade. HMRC gives the rate as 14% for disposals between 6 April 2025 and 5 April 2026 and 18% from 6 April 2026, subject to a lifetime limit on qualifying gains. Anti-avoidance rules can treat a winding-up distribution as income in certain circumstances. That question is settled when the UK return is prepared and should not be assumed.

How does the UK tax an unincorporated seller?

A sole trader or partner has only one layer of UK tax. Gains on goodwill and business premises are subject to Capital Gains Tax and are reported on the self-assessment return, with Business Asset Disposal Relief available where the business has been owned for at least two years and the other conditions are met. Balancing charges on plant and the sale of stock form part of the final period's trading profit and are subject to income tax and National Insurance, not Capital Gains Tax. So even in the UK a single sale price is divided between income and capital. The US return divides it again, along different lines.

What is Form 8594 and who has to file it?

Form 8594, Asset Acquisition Statement Under Section 1060, is filed by both buyer and seller when a group of assets that makes up a trade or business is transferred and the buyer's basis is determined wholly by the amount paid. Assets make up a trade or business if goodwill or going concern value could attach to them. Nothing limits the form to US businesses. An American selling a UK trade is within its terms whether or not the buyer has any US connection.

• Pattern B sellers attach Form 8594 to their Form 1040 for the year in which the sale date falls.
• Pattern A sellers: where the selling company is a controlled foreign corporation, the Form 8594 instructions say that each US shareholder attaches the form to their Form 5471. The company's US-basis earnings for the year are computed using the same allocation.

The seven classes and the residual method

Under section 1060 the total consideration, including liabilities the buyer takes over, is allocated in a fixed order:

1. Class I: cash and general deposit accounts.
2. Class II: actively traded personal property, certificates of deposit and foreign currency.
3. Class III: debt instruments, including trade receivables, and assets marked to market at least annually.
4. Class IV: inventory and property held mainly for sale to customers.
5. Class V: all assets not in another class. This usually means plant, equipment, vehicles, fixtures, land and buildings.
6. Class VI: section 197 intangibles other than goodwill, such as customer lists, licences, trademarks, workforce in place and a covenant not to compete.
7. Class VII: goodwill and going concern value.

Consideration is reduced by Class I assets first. The balance is allocated to each later class in turn, in proportion to fair market value within the class, and no asset other than goodwill can receive more than its fair market value. Whatever is left falls into Class VII. The form shows aggregate fair market value and allocated price by class, with Classes VI and VII reported together. No asset-by-asset list goes on the form, but the working papers behind it have to be asset by asset, because the character of the gain depends on the individual asset.

Consistency with the buyer's allocation

Form 8594 asks whether buyer and seller agreed an allocation in the contract or another signed document, and whether the figures on the form follow it. A written allocation generally binds both parties for US purposes unless the IRS determines that it is not appropriate. A UK sale agreement usually contains an apportionment, but it is drafted for UK purposes: stock at valuation, plant at an agreed figure, property, and goodwill as the balance. The US return has to map those headings into the seven classes. Receivables, customer contracts and covenants are often not separately priced in a UK agreement, and each needs a supportable value. Where the buyer is also a US filer, or is owned by one, the two Forms 8594 should agree, because the IRS can compare them.

The supplemental statement when the price changes

Completion accounts adjustments, retentions released from escrow and earn-out payments all change the consideration after the sale year. For each later year in which the amount increases or decreases, a new Form 8594 is filed with Parts I and III completed. It states the reason for the change and identifies the return with which the original was filed. The original form also asks for the maximum consideration on the assumption that every contingency is met.

How do the UK and US characterise each asset class?

Form 8594 class	Typical assets in a UK trading business	UK treatment (company seller)	US character
I and II	Cash left in the business, foreign currency balances	No gain on sterling cash. Exchange differences follow the accounts	No gain on cash. Currency gain or loss is possible on non-functional currency
III	Trade debtors sold with the business	Already recognised in trading profit. Any shortfall is a trading item	Ordinary income where the income has not yet been taxed, for example a cash-method seller. Otherwise little or no gain
IV	Stock and work in progress	Trading receipt, taxed as income	Ordinary income
V	Plant, machinery, vehicles, fixtures	Disposal value in the capital allowances pool. Balancing charge taxed as trading income	Depreciation recapture as ordinary income under section 1245. Any gain above original cost is section 1231 gain
V	Freehold or leasehold premises	Chargeable gain, plus disposal value for fixtures	Section 1231 gain, with prior depreciation on buildings taxed as unrecaptured section 1250 gain
VI	Customer lists, licences, trade marks, covenant not to compete	Intangibles regime credit or chargeable gain, depending on the asset's history	Capital gain if self-created and held as a capital asset. Recapture if amortised. Covenant is ordinary income
VII	Goodwill and going concern value	Intangibles regime credit or chargeable gain. For an unincorporated seller, a capital gain with BADR possible	Long-term capital gain where self-created and held for more than one year. Recapture where acquired goodwill has been amortised

How is each class taxed on the US return?

For a Pattern B seller the allocation is reported across several schedules. Inventory and receivables are ordinary income from the business. Equipment is reported on Form 4797. Gain up to the amount of depreciation allowed or allowable is ordinary income, and the words "or allowable" matter here. The basis of a UK asset is reduced by the depreciation that US rules permitted, even where earlier US returns claimed none or claimed UK capital allowances by mistake. Foreign-use assets are generally depreciated under the alternative depreciation system, so the US figures never match the UK pool. Self-created goodwill is not depreciable. It is a capital asset, and the gain is reported as long-term capital gain where the business has been carried on for more than a year.

This is the central mismatch. The UK may tax the whole of a sole trader's goodwill gain at the Business Asset Disposal Relief rate, while the US taxes the equipment recapture and the stock at ordinary rates, the goodwill at the long-term capital gains rate, and may add the Net Investment Income Tax depending on how actively the owner worked in the business. The total UK tax and total US tax are not compared in one figure. They are compared category by category under the foreign tax credit rules.

Why is a covenant not to compete ordinary income?

A payment for agreeing not to compete is treated as a payment for giving up the right to earn income, and it is ordinary income to whoever gives the covenant. Form 8594 asks specifically whether the buyer purchased a covenant not to compete or entered into an employment, management, lease or similar agreement with the seller or its owners, and requires a statement of the consideration if so. In Pattern A the question of who gave the covenant matters. A covenant given by the company is part of what the company sold. A covenant given personally by the American shareholder is income of the individual and belongs on Form 1040, whatever the UK return shows. UK agreements almost always contain restrictive covenants and often give them no separate price. The return preparer still has to consider whether any value is properly attributable to them.

Installment reporting where part of the price is deferred

Where part of the price is received after the year of sale, US gain on eligible assets is generally reported under the installment method on Form 6252 as payments arrive, unless the seller elects out. The method does not apply to inventory, and depreciation recapture is recognised in full in the year of sale whenever the cash is received. The UK generally taxes ascertainable deferred consideration in full at completion. The two countries can therefore tax the same proceeds in different years, and the foreign tax credit carryback and carryforward rules have to be worked through.

How does a company-level sale reach the American shareholder?

In Pattern A the company's gain is not reported on the individual's Schedule D. It reaches the shareholder in up to three stages.

• Earnings and profits. The sale is recomputed under US principles using the section 1060 allocation and US-basis depreciation, and the result increases the company's earnings and profits on Form 5471.
• Current inclusion. Gains on assets used in an active trade are generally not Subpart F income, but they are generally tested income of the controlled foreign corporation. The US shareholder may therefore have an inclusion in the sale year under the regime historically called GILTI and renamed net CFC tested income for later years, unless an election such as the high-tax exclusion applies. Amounts included become previously taxed earnings. We cover the form in our separate Form 5471 material and do not repeat it here.
• Distribution. A dividend is taxable to the extent of earnings and profits that have not already been taxed to the shareholder. A UK company's dividends can generally be qualified dividends if the holding period and other conditions are met. A distribution in complete liquidation is treated under section 331 as payment in exchange for the shares, giving capital gain or loss measured against US share basis. For a US shareholder of a controlled foreign corporation, section 1248 can recharacterise some of that gain as dividend income by reference to untaxed earnings.

The UK and US may therefore disagree on timing as well as character. The UK taxes the company in its accounting period and the shareholder in the tax year of distribution, which runs from 6 April to 5 April. The US may tax the shareholder in the calendar year in which the company's year ends, before any cash has been received.

Can UK corporation tax be credited against US tax?

In Pattern A, generally not by the individual directly. UK corporation tax is paid by the company, and an individual's Form 1116 covers taxes the individual paid or accrued. That includes UK income tax on the dividend or Capital Gains Tax on the winding-up distribution. Relief for corporate-level tax is available to individuals only through the specific rules for deemed-paid taxes, which in practice means a section 962 election to be taxed on the inclusion as if a domestic corporation, or through the high-tax exclusion taking the income out of the inclusion altogether. Each has reporting consequences in later years. Whether one applies is determined when the return is prepared, on the facts of the sale year.

In Pattern B with a disregarded UK company the position reverses. The US treats the company's corporation tax as paid by the owner, so it is potentially creditable on Form 1116 against the US tax on the asset gains. The later distribution is ignored by the US, because the owner is treated as already holding the cash. The UK still taxes it. That UK tax arises in a year when the US return may show no matching foreign-source income, and relief then depends on the carryback and carryforward rules and on which income category the tax falls into.

How are sterling amounts translated for the IRS?

Every figure on the US return is in dollars. A UK trade that keeps its books in sterling is generally a business unit with sterling as its functional currency. Its income is computed in sterling under US principles and then translated. For assets held outside such a unit, and for share basis in Pattern A, cost is translated at the rate when the cost was incurred and proceeds at the rate when received. A shareholder who subscribed for shares when the pound was strong can find that the dollar gain on liquidation is very different from the sterling gain reported to HMRC. Sterling proceeds held after completion can produce a separate currency gain or loss when they are converted or spent.

What does each sale-year return contain?

United Kingdom

• Company seller: the corporation tax return and computations for the period of sale, the capital allowances disposal entries, and the VAT position on the transfer.
• Shareholder: a self-assessment return showing the dividend or the capital distribution, with any Business Asset Disposal Relief claim made within the statutory time limit.
• Unincorporated seller: the final-period trading pages and capital gains pages. See our UK tax services for how these are prepared alongside the US return.

United States

• Form 8594, attached to Form 1040 or to Form 5471 as appropriate, with a supplemental form in any later year in which the price changes.
• Pattern B: Form 4797, Schedule D and Form 8949, the business schedule for ordinary items, Form 6252 where relevant, and Form 8858 or Form 8865 for a disregarded entity or partnership.
• Pattern A: Form 5471 with its income, earnings and previously taxed earnings schedules, the inclusion forms, and the dividend or liquidation gain on the individual return.
• Form 1116 by category, Form 8938, and the FBAR for the accounts that received the proceeds, including company accounts over which the owner has signature authority. Our US tax services page sets out the full filing set, and the FBAR penalty calculator illustrates the exposure where account reporting has been missed.

Owners of professional practices should read our separate guide to selling a UK dental or medical practice, which deals with the issues particular to that sector.

What if Form 8594 was never filed?

This is common. The sale was handled by UK advisers, the UK returns were filed correctly, and nobody mentioned a US form. There are three situations, and each has a different remedy.

• The US return was filed and the income was reported, but the form was omitted. Form 8594 is prepared from the completion documents and filed with an amended return, together with a reasonable cause statement. The instructions refer to the information return penalty provisions for a failure to file a correct form by the due date of the return.
• The income was reported, but under the wrong character. A typical case is the whole gain shown as capital gain with no recapture or covenant income. The allocation is rebuilt, the return is amended, and any additional tax and interest is paid. The foreign tax credit by category is recomputed at the same time.
• The sale, the company or the accounts were not reported at all. Where Forms 5471, FBARs or the income were missed over several years and the failure was non-wilful, the IRS streamlined filing procedures are generally the framework. They require three years of returns and six years of FBARs with a certification of non-wilful conduct. For taxpayers who meet the non-residency test, the Foreign Offshore Procedure carries no miscellaneous offshore penalty. A missing Form 5471 has its own penalty regime and can keep the assessment period open for the related items, so it should not be left unresolved.

In each case the starting documents are the same: the sale agreement and its schedules, the completion statement, the fixed asset register, the company's final accounts and corporation tax computations, and evidence of when and how the cash left the company. From those, the allocation can usually be reconstructed, even some years later.

How Jungle Tax prepares both sides of an asset sale

We start with the sale agreement and work outwards. We map the UK apportionment into the seven classes, establish US basis and depreciation asset by asset, and determine whether the seller for US purposes is the company or the individual. We then trace the proceeds through to the personal returns in both countries, so that the foreign tax credit claims match the UK tax actually paid. Our US-UK tax accountants prepare the Form 8594, the Form 5471 or Form 1040 schedules it attaches to, and the UK self-assessment return as a single reconciled set. Where earlier years are incomplete, we prepare those too.

If you have sold, or are about to complete on, the trade and assets of a UK business and hold a US passport or green card, please contact our cross-border team to arrange a confidential consultation. We will review the completion documents, confirm which forms are due in each country and by when, and tell you plainly whether anything from earlier years needs to be corrected.