IRS Streamlined Filing Experts: Unreported UK CSOP Gains

A qualifying UK Company Share Option Plan (CSOP) exercise is usually free of UK income tax, but a US citizen must still report the spread at exercise as compensation on Form 1040. Where that income was left off, the missing years can normally be corrected through the IRS Streamlined Foreign Offshore Procedure: three returns, six FBARs and a non-wilful certification.

Among senior US-citizen employees in the UK, this is one of the most common gaps we find. Nothing appears on the P60 and no PAYE is deducted. The plan literature says the exercise is tax-free, and for UK purposes it is. The US has no category for a UK tax-advantaged option, though. It sees an ordinary non-qualified option, and the spread becomes wages in the year of exercise. As IRS Streamlined Filing Experts, we see the same pattern each time. The exercise never reaches the US return, the nominee account holding the shares never reaches an FBAR, and the eventual sale is reported with the wrong cost basis. This guide explains how each of those errors arises and how a complete, defensible catch-up filing is prepared.

Why is a CSOP exercise tax-free in the UK but taxable in the US?

The two systems start from different places. In the UK, a CSOP is a statutory, HMRC-registered scheme. Provided the option was granted at no less than market value, the shares fall within the individual limit, and the exercise happens between the third and tenth anniversaries of grant (or earlier on specified good-leaver or corporate events), no income tax or National Insurance arises on exercise. The whole gain is pushed into capital gains tax on the eventual sale, using the exercise price as the base cost. HMRC's rules are set out in the Employee Tax Advantaged Share Scheme User Manual, and the 2023 changes are summarised in HMRC's CSOP guidance notes.

The US taxes its citizens on worldwide income and gives no recognition to foreign tax-favoured share schemes. The only US options with favourable treatment are incentive stock options under Internal Revenue Code section 422 and options under a qualifying section 423 employee stock purchase plan. A UK CSOP is designed for HMRC, not the IRS, and is almost never structured to meet those rules. For US purposes it is a non-statutory (non-qualified) option governed by section 83. A private-company option has no readily ascertainable fair market value at grant, so nothing is taxed then. At exercise, the difference between the market value of the shares and the exercise price is ordinary compensation income. The IRS summarises the general rule in Topic No. 427, Stock options.

The result is a structural mismatch. The UK taxes the whole gain once, as a capital gain on sale. The US taxes it twice over time: first as compensation at exercise, then as a capital gain on any growth after exercise. No UK tax arises at exercise, so there is often no UK tax to credit against the US charge in that year.

The CSOP rules a US holder needs to know (2026 position)

• Individual limit: From 6 April 2023, the market value of shares under unexercised CSOP options held by one employee, measured at grant, may not exceed GBP 60,000. The previous limit was GBP 30,000. Options above the limit are not qualifying CSOP options and are taxed in the UK as unapproved options.
• Exercise price: This must not be manifestly less than the market value of the shares at grant. For unlisted companies, the value is usually agreed with HMRC's Shares and Assets Valuation team.
• Exercise window: The exercise is tax-advantaged if it takes place at least three years and no more than ten years after grant. An earlier exercise can also qualify in specified circumstances, including good-leaver departures and certain takeovers.
• Non-qualifying exercise: If the conditions are not met, the UK charges income tax, and National Insurance where the shares are readily convertible assets, on the spread at exercise. That UK tax can then be credited in the US.
• Sale: UK capital gains tax applies to the difference between proceeds and the exercise price, after the annual exempt amount.

How the IRS taxes a UK CSOP option: the spread is wages

For the US return, three numbers matter: the exercise date, the fair market value per share on that date, and the exercise price paid. The spread (market value minus exercise price, multiplied by the number of shares) is compensation income in the tax year of exercise. It is converted to US dollars at the exchange rate on the exercise date. Because no Form W-2 is issued by a UK employer, the income is reported as wages without a W-2. Its character is earned income, not investment income, so it is not subject to the 3.8% Net Investment Income Tax. It is also not usually subject to US social security tax where the employee is covered by UK National Insurance under the US-UK totalisation agreement.

Sourcing the spread by workdays

Source matters because it decides whether a foreign tax credit is available at all. Under the Treasury regulations on compensation for personal services, stock option income is generally sourced on a time basis. The spread is split according to where the employee worked between grant and vesting (for a CSOP, usually the third anniversary). Consider an executive who spent the whole period working in London. The entire spread is foreign-source general-category income. Now take one who spent 20% of the grant-to-vest workdays in New York. That 20% is US-source, and no foreign tax credit can ever shelter it, whatever happens in the UK. Rebuilding a workday calendar for past years, from travel records, diaries and expense data, is often the most labour-intensive part of a CSOP catch-up.

Can the foreign earned income exclusion or foreign tax credit shelter it?

Most senior employees in the UK use the foreign tax credit rather than the foreign earned income exclusion, and for good reason. UK rates on high salaries exceed US rates. That usually leaves excess UK credits in the general category, which can be carried back one year and forward ten. This is the single most valuable point in many CSOP remediations: excess credits generated by UK PAYE on salary and bonus can often absorb much, sometimes all, of the US tax on a foreign-source CSOP spread. This only works if the Form 1116 carryover schedules for the affected years are rebuilt correctly. The foreign earned income exclusion is usually a poor fit. The spread relates to services performed years earlier, and the exclusion is limited for income received after the year following the year in which the services were performed.

Where excess credits are not available, for example because the executive was on the exclusion or split their year with the US, a genuine US liability remains. The streamlined filing will need to pay it, with interest.

US vs UK treatment of a CSOP option at a glance

Event	UK (HMRC), qualifying CSOP	US (IRS), US citizen
Grant	No tax	No tax (no readily ascertainable value)
Exercise within the 3 to 10 year window	No income tax or NIC	Spread taxed as ordinary compensation income, sourced by grant-to-vest workdays
Exercise outside the window (non-qualifying)	Income tax (and NIC if readily convertible) on the spread	Spread taxed as compensation; UK tax creditable on Form 1116
Cost basis of shares	Exercise price paid	Exercise price plus spread already taxed
Sale	CGT on proceeds less exercise price	Capital gain on proceeds less adjusted basis; long-term if held over one year after exercise
Currency	Computed in sterling	Computed in US dollars at each transaction date
Reporting of the holding	No annual reporting of the shares	FBAR and Form 8938 where thresholds are met

The later sale: two different gains on the same shares

Because the US has already taxed the spread, the US cost basis is the exercise price plus the spread, in dollars at the exercise-date rate. The UK base cost is simply the exercise price in sterling. The same disposal produces two very different gains:

• UK gain: the whole growth from the exercise price to the sale price, less the annual exempt amount, taxed at the prevailing CGT rates. For higher-rate taxpayers that is 24% on disposals since 30 October 2024.
• US gain: only the growth after exercise, measured in dollars. It is long-term if the shares were held for more than one year after exercise, and short-term if not.

The UK CGT on the sale is usually much larger than the US tax on the smaller US gain. The excess UK tax cannot be used against the earlier compensation income, because the two items fall in different years and different credit categories. The general category covers the spread; the gain normally sits in the passive category and is often re-sourced to the UK under the treaty. Excess passive credits carry forward and may be useful against later UK-source investment income. In the meantime, the US tax paid at exercise is a genuine extra cost of being a US citizen in a UK plan. The correct basis must also be carried into the sale year. If the spread was never reported and the broker records only the exercise price, the US gain on sale is overstated. That is taxing the same income twice on the US side.

Many CSOP exercises happen on a company sale, with shares bought and sold on the same day. The US answer is then simple, because almost all the value is compensation spread and there is little or no capital gain. But the amount is typically large, and it is the transaction most often missed.

Illustrative example

Assume an option granted in 2020 over 20,000 shares at GBP 3.00 (GBP 60,000 at grant), exercised within the qualifying window in 2023 when the shares were worth GBP 9.00, and sold in 2025 at GBP 10.00. All figures are illustrative only.

• UK: no tax at exercise. On sale, the gain is GBP 140,000 (GBP 200,000 proceeds less GBP 60,000 exercise price), reduced by the annual exempt amount and charged to CGT.
• US, exercise year: a GBP 120,000 spread (converted to dollars at the exercise-date rate) is compensation income on the 2023 return, with foreign tax credit relief only to the extent excess general-category credits are available.
• US, sale year: the basis is GBP 180,000 in dollar terms at exercise, so the US gain is roughly GBP 20,000 in dollar terms, adjusted for exchange movements, and long-term because the shares were held more than a year.

If the 2023 return omitted the spread, that year is inside a typical streamlined window. It is corrected by an amended return, and the 2025 sale is then reported with the higher, correct basis.

FBAR and Form 8938 on the share-plan account

CSOP shares are commonly held after exercise in a nominee or brokerage account in the UK, in the employee's name or for their benefit. That account is usually a foreign financial account for FBAR purposes. If the combined maximum value of all the individual's non-US accounts, including UK bank accounts, pensions within scope, ISAs and the share-plan account, exceeded USD 10,000 at any point in the year, a FinCEN Form 114 is required. For senior executives this threshold is almost always met by bank balances alone. The share-plan account is simply one more account that must appear.

Form 8938 (FATCA) is filed with the income tax return where specified foreign financial assets exceed the thresholds for taxpayers living abroad. For a single filer these are USD 200,000 at year-end or USD 300,000 at any time; for joint filers, USD 400,000 or USD 600,000. The share-plan account belongs on Form 8938. Shares in a private UK employer held directly by certificate, not through a financial account, are not FBAR accounts, but they can still be specified foreign financial assets for Form 8938. Whether unexercised employer options are themselves reportable depends on their terms and should be analysed rather than assumed.

A few further points arise less often but matter when they do. An executive who is an officer or director of a UK company in which US persons acquire a 10% interest may have a Form 5471 filing, and so may one who personally reaches a 10% holding. Shares in an operating trading company are generally not a PFIC. A missed FBAR is the reason many clients approach the streamlined procedures in the first place, and CSOP holdings are often discovered during that review.

What the UK side of the return must show

The UK side is usually straightforward, but it must agree with the US filing. The employer reports CSOP grants and exercises to HMRC on its annual share scheme return. The employee reports nothing at a qualifying exercise. On sale, a Self Assessment capital gains computation is required where the gain exceeds the annual exempt amount or the proceeds exceed the reporting threshold. Where part of an option exceeded the GBP 60,000 limit, or the exercise fell outside the qualifying window, the UK will have charged income tax, normally through PAYE where the shares were readily convertible. That UK tax needs to appear on Form 1116 for the same year. It is common to find that the unapproved portion was taxed correctly in the UK but never reached the US return. For UK compliance alongside the US catch-up, see our UK tax services.

How unreported CSOP income is fixed through the Streamlined Foreign Offshore Procedure

For a US citizen living in the UK, the usual route is the Streamlined Filing Compliance Procedures, specifically the foreign offshore version described on the IRS page for US taxpayers residing outside the United States. In outline:

1. Eligibility. The taxpayer must meet the non-residency test: in at least one of the three most recent years for which the return due date has passed, they had no US abode and were physically outside the US for at least 330 full days. The failure must have been non-wilful. The taxpayer must not be under IRS civil examination or criminal investigation, and must hold a valid taxpayer identification number.
2. Three years of returns. The most recent three years for which the due date, including extensions, has passed. Where the original returns were filed without the CSOP spread, these are amended returns on Form 1040-X. Where nothing was filed, they are delinquent original returns. Each is marked as a Streamlined Foreign Offshore submission.
3. Six years of FBARs. The most recent six years for which the FBAR due date has passed, filed electronically through the BSA E-Filing System, with the share-plan account and every other foreign account included.
4. Form 14653. The certification by US persons residing outside the United States, including a specific, factual non-wilful narrative. The Form 14653 narrative is where CSOP cases are often strong. The exercise was tax-free under a government-registered UK scheme, no UK tax or payroll entry arose, and the employer's materials described the option as tax-free. The narrative should explain that plainly and truthfully, not in boilerplate.
5. Payment. Any US tax and statutory interest must be paid in full with the submission. Under the foreign offshore procedure, the miscellaneous offshore penalty, failure-to-file and failure-to-pay penalties, and FBAR and information-return penalties are not imposed on an eligible, accepted submission.

What if the exercise year is outside the three-year window?

The streamlined procedure requires only the three most recent years. An exercise in an earlier year does not need its own amended return within the submission. It still matters, though. The shares' US basis, the Form 1116 carryover chain and any later sale all depend on how the earlier exercise is treated. We document a consistent, supportable position for those earlier years, so that a sale inside the window is reported correctly and the carryover schedules reconcile.

Is domestic streamlined ever the right route?

If the executive has since returned to the US and fails the non-residency test for every year in the window, the Streamlined Domestic Offshore Procedure applies instead. It requires amended returns (original returns must have been filed) and carries a 5% miscellaneous offshore penalty on the highest aggregate year-end balance of the affected foreign financial assets. Choosing the right route, and timing it, can make a material difference to the cost. Where wilfulness is a genuine concern, streamlined is not the right tool, and that must be assessed before anything is filed.

Building the file: documents we prepare from

• CSOP grant certificates, the plan rules and any HMRC valuation agreement for the exercise price.
• Exercise statements showing the date, number of shares, exercise price and market value, and any sell-to-cover or cashless mechanics.
• Nominee or broker statements for each year, including the maximum value for FBAR purposes.
• Payslips, P60s and P11Ds, used to rebuild UK tax paid and the Form 1116 excess credit position.
• Travel and workday records covering each grant-to-vest period, used for sourcing.
• Prior US returns as filed, and UK Self Assessment returns for the same years.

Our work is return preparation and compliance. We rebuild the numbers, prepare the amended or delinquent returns, FBARs, Form 8938, Form 1116 and Form 14653, and make sure the US and UK filings reconcile. Executives with wider equity packages, including RSUs, deferred bonus and plans in several jurisdictions, can read more on our US-UK tax accountants for executives page.

Common errors we correct in CSOP cases

• Treating the CSOP as an incentive stock option and reporting nothing at exercise.
• Reporting the spread but sourcing it all to the UK when the grant-to-vest period included US workdays.
• Claiming a foreign tax credit for UK tax that was never paid on the spread, or failing to use real excess credits from salary.
• Reporting the sale with the exercise price as basis, which taxes the spread a second time.
• Converting at a single annual average rate instead of transaction-date rates for exercise and sale.
• Omitting the nominee account from FBAR and Form 8938, often alongside ISAs and pensions.
• Missing the unapproved portion above the GBP 60,000 limit, which the UK taxed but the US return never saw.

Why the CSOP gap should be closed now

The IRS and HMRC exchange information on financial accounts under FATCA and the Common Reporting Standard. A UK nominee account holding shares for a US citizen is a reportable account. A voluntary, complete streamlined submission, made before any IRS contact, keeps the most favourable outcome available. Once the IRS makes contact, the streamlined procedures are closed. The US liability on a CSOP spread is also often smaller than clients fear, because excess UK credits from salary absorb much of it. You can only know that once the credit history is properly rebuilt.

If you are a US citizen who has exercised CSOP options in the UK, or expects to on an exit, Jungle Tax prepares the full cross-border filing: the missed US returns, FBARs, Form 8938 and the non-wilful certification, reconciled against your UK position. For a confidential review of your share plan history and the fastest compliant route back into good standing, contact our cross-border team.