Dual National US UK: Incorporating a Sole Trade, Both Returns

When a Dual national US UK sole trader moves the business into a new UK limited company, the UK return reports a market-value disposal of goodwill, usually deferred by an incorporation relief claim, while the US return reports an outbound transfer to a foreign corporation on Form 926, with gain recognition that section 351 does not prevent.

That single sentence hides most of the difficulty. The two systems look at the same afternoon's paperwork and reach opposite conclusions about whether anything taxable happened. This guide, written by the cross-border return-preparation team at Jungle Tax, sets out what each return has to show for the year of incorporation: the UK Self Assessment return for the tax year of transfer, the US Form 1040 for the calendar year of transfer, and the first filings of the new company. It is a reporting guide. It does not address whether a business should incorporate, or how to arrange an incorporation to reduce tax; it explains what has to be disclosed once the transfer has happened, and where earlier years have gone wrong.

What actually happens, in tax terms, on the day of incorporation?

A sole trade is not a separate person. Neither HMRC nor the IRS sees an entity being moved; both see an individual disposing of a bundle of separate assets (goodwill, equipment, stock, debtors, sometimes premises) to a company, and receiving shares, a credit to a director's loan account, or a mixture of the two. The same analysis applies to each partner where a partnership incorporates.

Three features drive everything that follows:

• The company is connected to the transferor. For UK capital gains purposes the disposal is treated as made at market value, whatever figure the sale agreement states.
• The company is foreign to the United States. A UK private limited company is a foreign corporation for US purposes, so the transfer is an outbound transfer by a US person.
• The two tax years do not line up. A transfer on 1 July 2026 falls in the UK tax year 2026-27 (return due 31 January 2028) and in US calendar year 2026 (return due in 2027). The US return is prepared first, usually before the UK computation is final.

How does the UK return report the transfer of goodwill?

Goodwill built up by the trader personally usually has no acquisition cost, so its whole market value is a chargeable gain. Other chargeable assets, typically freehold or leasehold premises, are computed in the ordinary way. Plant and machinery rarely produces a capital gain because it is normally worth less than it cost, and trading stock and debtors are not chargeable assets at all. The gains are reported on the capital gains pages of the Self Assessment return for the tax year in which the transfer takes place.

Incorporation relief under TCGA 1992 s162

Where the whole business is transferred as a going concern, with all of its assets (cash may be left out), wholly or partly in exchange for shares issued by the company, section 162 defers the gain. The deferred gain is deducted from the base cost of the new shares, so it is postponed until the shares are disposed of rather than forgiven. Where the consideration is partly shares and partly something else, such as a loan account credit, only the proportion attributable to shares is deferred and the remainder is taxed in the year of transfer.

For years the relief applied automatically when the conditions were met. That has changed. HMRC's Capital Gains Manual now states that where a business is transferred to a company on or after 6 April 2026, relief under section 162 requires a claim containing the details HMRC specifies. According to HMRC's guidance at CG65735:

• the claim must be made by the first anniversary of the 31 January following the tax year of transfer, so a transfer in 2026-27 can be claimed until 31 January 2029;
• in most cases it is made with the tax return for the year of transfer, which must identify the disposals covered and the total relief claimed;
• the supporting details must be in writing and, for a return filed online, are uploaded as an attachment;
• the details include a description of the business, the type of transferor, the company's name and registration number, the number, type and issue date of the shares, each chargeable asset and its value at transfer, the total value of non-chargeable assets, the value of any non-share consideration, the relief claimed and the resulting base cost of the shares.

The practical consequence for return preparation is simple and unforgiving: for a 2026-27 or later incorporation, a return that merely omits the gain on the footing that relief is automatic is no longer a complete return. The older ability to elect for the relief not to apply remains part of the legislation for earlier transfers and is a point to check against the year in question.

Why is business asset disposal relief usually unavailable on the goodwill?

Where consideration is left outstanding on a director's loan account instead of being taken in shares, the gain on the goodwill is taxed in the year of transfer. One might expect business asset disposal relief to apply, since a business is being disposed of. In most incorporations it does not. HMRC's guidance at CG64006 explains that, for disposals on or after 3 December 2014, goodwill is not a relevant business asset where it is disposed of to a close company and, immediately afterwards, the individual (alone or with connected persons) holds 5% or more of its ordinary share capital or voting rights. A founder's own company almost always fails that test, so the gain is charged at the main capital gains tax rates, currently 18% and 24% depending on the individual's income.

What else changes on the UK return in the year of incorporation?

• Cessation of the trade. The self-employment pages show the date the trade ceased and a final period of account running to the transfer date. Because trading profits are now taxed on a tax-year basis, the old overlap relief that used to be released on cessation should already have been used in the 2023-24 transition and is now only part of the file history.
• Capital allowances. Without an election, plant and machinery is treated as disposed of at market value, which can produce a balancing charge in the final period. Where the trader and the company are connected, a joint election under CAA 2001 s266 treats the assets as passing at tax written-down value. The election must be made within two years of the succession.
• Trading stock. Stock passing to a connected company is brought in at market value unless an election is made to substitute a lower figure permitted by the legislation.
• VAT. If the conditions for a transfer of a going concern are met, the transfer is outside the scope of VAT and no VAT is charged on the assets. The company must register (or take over the existing registration number) where the seller was a taxable person. HMRC's conditions are set out in VAT Notice 700/9.
• Stamp duty land tax. If premises pass to the company, the company is generally charged on market value because it is connected with the transferor, regardless of the price stated. Special rules apply to transfers from a partnership, and Scotland and Wales have their own land transaction taxes.
• New income sources. From the transfer date the individual's return shows employment income from the directorship and dividends from the company in place of trading profit, and Class 2 and Class 4 National Insurance stop.

The company's own obligations begin immediately. It must be registered with HMRC for corporation tax within three months of starting to trade, operate PAYE on any salary, file a company tax return within twelve months of the end of each accounting period and pay the tax nine months and one day after it, and deliver a confirmation statement and annual accounts to Companies House, with the first accounts due 21 months after the date of incorporation for a private company.

How does the US return treat the same transfer?

A purely domestic incorporation is the textbook non-event of US tax law. Under section 351 no gain or loss is recognised where property is transferred to a corporation solely for its stock and the transferors control the corporation immediately afterwards, control meaning at least 80% of the voting power and at least 80% of each other class of stock. Two familiar exceptions apply even at home: gain is recognised up to the amount of any boot (cash, a loan account credit or other property received alongside the shares), and under section 357(c) gain arises where the liabilities assumed by the company exceed the total tax basis of the assets transferred, a real risk for a service business whose assets are mostly self-created and carry little or no basis.

Why does section 367 override section 351 for a UK company?

Section 367(a) provides that when a US person transfers property to a foreign corporation in an exchange that would otherwise qualify under section 351, the foreign corporation is not treated as a corporation for the purpose of the non-recognition rule. The effect is that gain, but not loss, is recognised as though the assets had been sold at fair market value. There used to be an exception for assets transferred for use in the active conduct of a trade or business outside the United States. The Instructions for Form 926 confirm that this exception was repealed for transfers after 2017, so tangible business assets such as equipment and stock are now subject to full gain recognition, including any depreciation recapture, in US dollars at the exchange rate on the transfer date.

How is goodwill treated under section 367(d)?

Intangibles follow a separate rule. For tax years beginning after 2017 the statutory definition of intangible property was broadened to include goodwill, going concern value and workforce in place. Under section 367(d), a US person who transfers such property to a foreign corporation in a section 351 exchange is treated as having sold it in exchange for annual payments contingent on its productivity or use, over its useful life, in amounts commensurate with the income the intangible generates.

For the dual national this means that, instead of one gain in the year of incorporation, the Form 1040 picks up a deemed annual amount of ordinary income for years afterwards, even though the company pays the individual nothing under that heading. The amount has to be supported by a valuation, reported consistently every year, and reflected in the company's earnings and profits. If the shares or the intangible are later disposed of, the remaining value is generally brought into account at that point. Section 367(d) is the provision most frequently missing from returns prepared by generalists, because nothing in the UK paperwork hints at it.

What does Form 926 report, and what is the penalty for missing it?

Form 926, Return by a U.S. Transferor of Property to a Foreign Corporation, is attached to the individual's income tax return for the year of the transfer. It identifies the company, describes each category of property transferred with its fair market value, basis and gain recognised, and has a dedicated section for intangible property within section 367(d). Transfers of cash are also reportable where the transferor holds at least 10% of the company immediately afterwards or has transferred more than $100,000 in the twelve months ending on the transfer date.

The penalty for failing to file is 10% of the fair market value of the property transferred, limited to $100,000 unless the failure was due to intentional disregard, and it does not apply where the failure is shown to be due to reasonable cause and not wilful neglect. The period for assessing tax on the transfer also stays open until three years after the required information is provided. Catch-up filing for earlier years is a separate subject covered elsewhere in our guides; this article is concerned with the return for the year of incorporation itself.

What else changes on the US return?

• The company becomes a controlled foreign corporation. A founder who owns it outright meets the tests alone, so Form 5471 is due with the Form 1040 from the first year, including the schedule that reports the acquisition of the shares. That form has its own penalty regime and is not explored further here.
• Self-employment reporting stops part-way through the year. The final Schedule C covers 1 January to the transfer date. Where the individual has been covered by UK National Insurance under the US-UK social security agreement, no US self-employment tax was due on those profits and the position should be documented in the same way for the final period.
• Salary and dividends begin. Directors' salary is reported as foreign wages (there is no Form W-2) and dividends as foreign dividends, each converted to dollars and each carrying its own foreign tax credit analysis.
• Share basis is tracked in dollars. The US basis of the shares starts from the basis of the assets transferred, adjusted for gain recognised and consideration received. It will not match the UK base cost, and both figures need to be preserved.

A UK private limited company is eligible to make an entity classification election (the so-called check-the-box election) to be treated as transparent for US purposes, which is made on its own form with its own deadlines and changes the analysis above entirely; it is mentioned here only so that the preparer confirms whether one was filed.

Where do the US and UK treatments diverge?

The table summarises the position for a transfer on or after 6 April 2026 where the whole business passes to a company owned by the transferor.

Item	UK return (HMRC)	US return (IRS)
Nature of the event	Disposal of each chargeable asset to a connected company at market value	Outbound transfer of property to a foreign corporation
Deferral where shares are issued	Incorporation relief under TCGA 1992 s162, by claim; gain deducted from share base cost	Section 351 non-recognition overridden by section 367(a) for a foreign transferee
Goodwill	Gain deferred if s162 is claimed; otherwise taxed at 18% or 24% with business asset disposal relief normally denied	Section 367(d): deemed annual payments taxed as ordinary income over the useful life
Plant and equipment	Capital allowances; s266 election passes assets at tax written-down value	Gain recognised at fair market value, with depreciation recapture; no equivalent election
Loan account consideration	Reduces s162 relief proportionately; that part of the gain is taxed now	Boot; gain recognised to that extent
Liabilities assumed	By concession not normally treated as consideration for s162	Section 357(c) gain if liabilities exceed basis
Losses on individual assets	Allowable, subject to the connected-party restriction	Not recognised
Disclosure	Capital gains pages plus written s162 claim details	Form 926 with Form 1040; Form 5471 from year one
Deadline	31 January following the tax year; s162 claim up to twelve months later	Due date of the Form 1040 for the calendar year, including extensions
Penalty for non-disclosure	Inaccuracy and late-filing penalties based on tax lost	10% of the value transferred, capped at $100,000 absent intentional disregard
Currency	Sterling	US dollars at transfer-date rates

Why does the foreign tax credit so often fail to match?

A foreign tax credit works when both countries tax the same income in the same period. Incorporation breaks that link in both directions.

UK defers, US taxes. Where section 162 is claimed in full, no UK capital gains tax is paid in the year of transfer. The US nevertheless recognises gain on tangible assets under section 367(a) and begins the annual section 367(d) inclusions on goodwill. There is no UK tax on those items to credit. Relief then depends on what other foreign tax the individual has available in the relevant credit category, whether paid in that year or carried from other years under the one-year carry-back and ten-year carry-forward rules, and on the treaty's re-sourcing provisions for US citizens resident in the UK. Each of those needs to be worked through on Form 1116 rather than assumed.

UK taxes later, US has already taxed. When the shares are eventually sold, the UK charges the deferred gain because the share base cost was reduced. The US, having already taxed part of the same economic value, computes a smaller gain on the shares. The UK tax in that later year may then exceed the US tax on the sale, leaving credits that cannot be used against the earlier US liability.

UK taxes now, US character differs. Where the goodwill is transferred for a loan account credit, UK capital gains tax is paid for the year of transfer. The US also recognises gain, so timing is closer, but the character can differ. Gain on a sale of amortisable property to a corporation the seller controls can be treated as ordinary income under the related-party rule in section 1239, and instalment reporting is generally unavailable for such sales, so the whole gain may fall into the year of transfer at ordinary rates. UK tax paid by 31 January after the tax year also has to be matched to the correct US year under the individual's chosen method of claiming credits, paid or accrued.

None of this is planning. It is the arithmetic that has to appear on the two returns for a transaction that has already taken place, and it is why our US return preparation and UK return preparation for a business owner are done from one set of working papers.

A worked example with hypothetical figures

The figures below are invented round numbers chosen to show the mechanics. Sterling and dollar amounts are treated as equal purely for simplicity, annual exemptions are ignored, and the individual is assumed to be a higher-rate UK taxpayer in the top US bracket.

Alex, a US citizen and British citizen resident in London, has traded as a consultant for twelve years. On 1 July 2026 Alex transfers the business to a new UK company in which Alex holds all the shares. The assets are goodwill valued at 400,000 with no cost, and equipment worth 50,000 with a UK tax written-down value of 30,000 and a US adjusted basis of 20,000. The company assumes no liabilities.

Route A: everything transferred for shares

• UK 2026-27 return. Gain on goodwill of 400,000, reported with a written section 162 claim. UK tax in the year: nil. The shares are worth 450,000 and their base cost becomes 50,000 after deducting the deferred gain. A section 266 election passes the equipment at 30,000, so no balancing charge arises.
• US 2026 return. Form 926 reports both assets. Section 367(a) gain on the equipment is 30,000 (50,000 less 20,000), ordinary income to the extent of prior depreciation. The goodwill falls under section 367(d); if a valuation supports a deemed annual payment of 40,000, that amount is ordinary income in 2026 (for the part-year) and each later year. Form 5471 is filed for the company's first period.
• Mismatch. US tax arises on 30,000 immediately and on a recurring 40,000 with no UK tax on the same items. Had Form 926 been omitted, the exposure would be 10% of 450,000, or 45,000.

Route B: goodwill left outstanding on loan account, equipment for shares

• UK 2026-27 return. The consideration is 400,000 of loan account and 50,000 of shares, so only one-ninth of the 400,000 goodwill gain (about 44,000) qualifies for deferral if section 162 is claimed, and roughly 356,000 is chargeable. Business asset disposal relief is denied on goodwill, so tax at 24% is about 85,000, payable by 31 January 2028.
• US 2026 return. The 400,000 loan account credit is boot. Gain on the goodwill is recognised in 2026 up to that amount, potentially as ordinary income under section 1239, alongside the 30,000 on the equipment. At an assumed 37% the US tax on the goodwill would be about 148,000.
• Mismatch. The UK tax of about 85,000 is creditable, but it may leave residual US tax of some 63,000, and because the UK tax is paid in a later calendar year the credit has to be matched to 2026 under the accrual method or carried back.

Neither route is presented as better. The example shows that the same transaction produces a different reportable result on each return, and that the difference is only visible when both are prepared together.

What records does the preparer need for the incorporation year?

• The business transfer agreement, board minutes and share allotment return, showing exactly what was given for what.
• A contemporaneous valuation of goodwill, used consistently for the UK market-value computation, the US fair market value on Form 926 and the section 367(d) annual amount.
• Completion accounts to the transfer date, a fixed-asset register with both UK written-down values and US adjusted basis, and a schedule of liabilities assumed.
• The section 162 claim details and any section 266 and stock elections, with dates.
• VAT transfer correspondence and, where premises moved, the land transaction return.
• The company's first accounts, corporation tax computation and payroll records for the Form 5471 and for salary and dividend reporting.
• Exchange rates for the transfer date and the year averages used.

What if the incorporation happened years ago and the US side was never reported?

This is common. The UK accountant handled an incorporation correctly under UK law, relief applied automatically under the rules then in force, and nobody told the US preparer, or there was no US preparer. The missing items are usually Form 926 for the year of transfer, Form 5471 for every year since, any section 367 income, and the reporting of salary and dividends. Where the failure was non-wilful, the IRS streamlined procedures may allow the returns to be brought up to date in an orderly way; our streamlined filing team prepares those submissions, and our US-UK accountants rebuild the incorporation-year computations from the original UK documents. For individuals with larger or more complex holdings, the same work sits within our cross-border compliance service.

Key points for the year of incorporation

• The UK sees a market-value disposal that can be deferred by an incorporation relief claim; from 6 April 2026 the claim must actually be made, with specified details.
• Business asset disposal relief is generally denied on goodwill transferred to the founder's own close company.
• The US does not extend section 351 to a transfer to a UK company; section 367(a) taxes tangible assets and section 367(d) spreads goodwill into annual ordinary income.
• Form 926 is required with the Form 1040 for the year of transfer and carries a penalty of 10% of the value transferred.
• The company is a controlled foreign corporation from day one.
• Foreign tax credits rarely align, because the two countries tax the same value in different years and sometimes with different character.

If you have incorporated a UK business, or are reviewing an incorporation from an earlier year that was reported on only one side of the Atlantic, we can prepare or correct both returns from a single reconciled file. To arrange a confidential consultation, contact our cross-border team and we will tell you plainly what needs to be filed, in which country, and by when.