US Personal Tax Services: Continuation Fund Roll or Sell

A GP-led continuation fund election is reported in two places at once. Selling is a taxable disposal in both the US and the UK. Rolling may defer US tax under the partnership contribution rules, but only if the deal was structured that way. The UK may still see a disposal. The election-year returns have to reconcile both views.

Our US personal tax services for UK-resident American private-equity investors increasingly start with one document: a continuation vehicle election notice that was signed in a hurry and never properly reflected on a Form 1040 or a UK Self Assessment return. The figures are usually large and the K-1 often arrives late. The US and UK treatments rarely line up. This guide explains how each choice is taxed in each country, which information returns the election can trigger, and how Jungle Tax prepares or corrects the election-year filings. It covers compliance only. We do not advise on whether to roll or sell, or on how the transaction should have been structured.

What is a GP-led continuation fund election?

In a GP-led secondary, the sponsor moves one or more assets out of an existing, usually mature fund and into a new continuation vehicle (CV). The CV is capitalised by secondary buyers and by the sponsor's own rolled carry and commitment. Existing limited partners are typically offered three choices:

• Sell: take cash at the transaction price, usually set by a competitive process and supported by a fairness opinion.
• Roll: exchange your indirect interest in the asset for an interest in the CV, sometimes on revised economics (new management fee, new carry waterfall, new hurdle).
• Status quo or split election: some deals let an LP roll part of its position and sell the rest, or keep an unchanged interest on the original terms.

Most election windows are short, often 20 business days or so, and the documents put commercial terms first. Tax disclosures are usually generic and written for a US taxable LP or an institution, not for an American individual who lives in London and is taxed in two places. That gap is where reporting errors start.

How the US taxes the sell option

For a US citizen or green-card holder, residence in the UK does not change the basic rule. You are taxed on worldwide income and gains. The mechanics of a cash exit depend on how the sponsor built the deal, and the Schedule K-1 is the primary evidence.

Sale of the partnership interest versus a fund-level asset sale

There are two common patterns:

• Fund-level sale: the existing fund sells the asset to the CV for cash and distributes the proceeds. You do not sell anything yourself. Your share of the fund's gain flows to you on the existing fund's K-1, and the cash is a distribution that reduces your outside basis.
• Direct sale of an interest: you sell your LP interest, or a strip of it, to a buyer. This is a sale of a partnership interest under section 741. It is generally capital, but the part of the price that relates to the partnership's "hot assets" (unrealised receivables and inventory) is ordinary income under section 751(a).

In both cases, long-term capital gain is available where the relevant holding period exceeds one year. The top federal long-term rate is 20%, and the 3.8% net investment income tax (NIIT) usually applies on top. An American living in the UK often treats NIIT as fully absorbed by UK tax. Under the IRS's position, it generally is not. Expect a residual US liability that foreign tax credits do not cover.

Character surprises on the K-1

Continuation deals often sweep up accrued but unpaid interest on shareholder loans, preferred returns, or dividend arrears. Those amounts can come through as ordinary interest or dividend income rather than capital gain. Transaction costs may also be allocated to you. Each needs its own line on the return, so a single "gain on sale" figure taken from the distribution notice is almost always wrong.

How the US taxes the roll option

Rolling feels like doing nothing. For US purposes, it may or may not be.

Tax-deferred rollover: when section 721 applies

The most common deferral structure has the existing fund contribute the asset to the CV in exchange for CV interests and cash. The cash goes to selling LPs and the CV interests go to rolling LPs. Under section 721, a contribution of property to a partnership in exchange for a partnership interest is generally non-recognition, so a rolling LP can defer gain and carry over both basis and holding period.

Two rules can cut into that deferral, and both have to be checked against the deal papers:

• Disguised sale (section 707(a)(2)(B)): where a contribution is paired with cash going back to the contributor, part of the transfer can be recast as a taxable sale. In a well-built CV the cash is aimed at sellers, but split elections and fee or expense reimbursements can leave rolling LPs with a partly taxable result.
• Investment company exception (section 721(b)): non-recognition can be switched off where the transfer diversifies the transferors' interests into a partnership that would be an investment company. Single-asset CVs rarely trip this, but multi-asset deals need a look.

Section 704(c) also matters. The built-in gain at the date of contribution is tracked and allocated back to rolling partners when the CV eventually exits. Deferral is a timing benefit, not a permanent one.

Taxable rollover: "sell and reinvest"

Some sponsors do not use a contribution structure. The existing fund sells to the CV for cash, every LP is treated as a seller, and rolling LPs reinvest their after-tax proceeds. In that case the roll is a fully taxable sale followed by a new purchase. The holding period restarts and basis is reset. We regularly see returns where a client treated a roll as non-taxable even though the K-1 reported the full gain, or the reverse.

Section 1061: carried interest for fund executives

If you are a deal partner or principal and your carry or GP commitment was crystallised, rolled, or re-cut in the CV, section 1061 applies to any applicable partnership interest (API). Gain on API assets held for three years or less is recharacterised from long-term to short-term capital gain and taxed at ordinary rates. The regulations require the fund to report the one-year and three-year distributive share amounts, usually on an API statement attached to the K-1.

Points we see missed in election-year returns:

• Crystallised carry on the sale of an asset held more than three years is outside the recharacterisation. Carry on a younger bolt-on acquisition may not be.
• Where carry is rolled into the CV under a contribution structure, the holding period can tack. If it is reset, a later CV exit within three years falls back into short-term treatment.
• The three-year rule is a US concept only. The UK applies its own carried interest regime with different tests (see below), so the same receipt can be long-term in one country and income-like in the other.

Non-US vehicles: Form 8865, K-3 and PFIC questions

Many continuation vehicles for European assets are Cayman, Luxembourg, Jersey, Guernsey or English limited partnerships. To a US individual they are foreign partnerships, and the election can trigger reporting that has nothing to do with the tax due.

Form 8865

Most LPs hold far below the 10% thresholds that drive Form 8865 categories 1 and 2. The roll is a different matter. A US person who transfers property to a foreign partnership is generally required to report it under section 6038B if, after the transfer, they hold at least 10%, or if the value they contributed in the 12 months ending with the transfer exceeds $100,000. A rolled position in a seven- or eight-figure asset can easily exceed the $100,000 figure. The penalty for failing to report a section 6038B transfer is generally 10% of the fair market value of the property, capped at $100,000 unless the failure was intentional. See the IRS page About Form 8865 for the current categories and instructions.

Schedule K-3

Schedule K-3 carries the international detail: foreign-source income, the country breakdown needed for Form 1116, and passive or general limitation categories. For a UK resident claiming credit for UK capital gains tax, the K-3 is what lets the US gain be re-sourced and matched to UK tax. If the CV or the old fund relies on a K-3 filing exception, request the information anyway, because without it the foreign tax credit computation is guesswork.

PFIC exposure

Operating portfolio companies are rarely PFICs. A foreign corporate blocker, a holding company with mainly cash and investments, or a CV that holds a stake in a listed foreign fund can be one. A US partner is treated as an indirect shareholder of any PFIC held through a partnership, and Form 8621 may be required, with excess-distribution treatment on gains unless a QEF or mark-to-market election was made. See About Form 8621.

Form 8938 and FBAR

An interest in a foreign partnership is a specified foreign financial asset for Form 8938. For filers living abroad, the thresholds are $200,000 at year-end or $300,000 at any time for single filers, and $400,000 or $600,000 for joint filers. A fund interest is generally not an FBAR account, but the cash proceeds landing in a UK bank or brokerage account will be.

The UK side: CGT, transparency and carried interest

A UK-resident American is taxed by HMRC on worldwide gains. Anyone who arrived on or after 6 April 2025 should check whether the four-year foreign income and gains regime applied in the election year. The UK view of the election is built on different foundations from the US view.

Partnership transparency and the "fractional share" approach

For capital gains, HMRC generally looks through a partnership and treats each partner as owning a fractional share of each partnership asset. The guidance is in HMRC's Capital Gains Manual, CG27000 onwards. When the existing fund disposes of an asset to the CV, a UK-resident LP is usually treated as disposing of a fractional share. That is a chargeable disposal whether the LP sells or rolls.

Is there UK rollover relief on a roll?

This is the most important cross-border mismatch. US deferral under section 721 has no automatic UK equivalent for an individual partner moving between two partnerships. Share-for-share and reorganisation reliefs are aimed at company shares and apply only in particular corporate structures. In many CV transactions, therefore, a UK-resident roller has a UK chargeable gain even though no US gain is recognised that year. Later, when the CV exits, the position reverses: the US taxes a gain (including the deferred 704(c) gain) and the UK taxes only the post-roll uplift. Unless the returns are prepared with that timing difference mapped out, foreign tax credits are stranded in the wrong year.

UK rates in the election year

For disposals on or after 30 October 2024, the main CGT rates are 18% and 24%. Carried interest was charged at 32% for 2025/26. From 6 April 2026 the UK moved carried interest into the income tax framework. Qualifying carried interest is taxed as trading profits with only 72.5% of the amount brought into charge, while income-based carried interest (broadly carry from funds with an average holding period under 40 months) is fully taxable as trading income. Which regime applies depends on the date the carry arose, so a deal that closed across 5 April 2026 needs care.

Offshore funds and non-reporting status

Transparent partnerships are not usually offshore funds. Where the CV sits above a corporate or unit-trust layer, however, check whether the offshore funds rules apply. A gain on a non-reporting offshore fund is taxed as income, not capital gain, which changes both the UK rate and the US foreign tax credit basket.

US vs UK treatment at a glance

Issue	US (IRS)	UK (HMRC)
Selling LP	Capital gain via K-1 or section 741 sale; section 751 ordinary slice; 20% plus 3.8% NIIT	Disposal of fractional share of fund assets; CGT at 18%/24%
Rolling LP (contribution structure)	Often deferred under section 721; basis and holding period carry over; watch disguised sale rules	Commonly a chargeable disposal in the election year; no automatic partnership-to-partnership relief
Rolling LP (sell and reinvest)	Fully taxable; new basis and holding period	Fully taxable; new acquisition cost
Carried interest	Section 1061 three-year rule; API statement on K-1	32% CGT in 2025/26; from 6 April 2026 trading income with 72.5% multiplier for qualifying carry; 40-month average holding period test
Tax year	Calendar year	6 April to 5 April
Non-UK/US vehicle reporting	Form 8865 (section 6038B transfer), K-3, Form 8621, Form 8938	Self Assessment capital gains pages; offshore funds check
Double tax relief	Form 1116 credit with treaty re-sourcing; NIIT generally not creditable	Credit for US tax where the UK is not the primary taxing state

Why the election year goes wrong

Across the continuation-fund files we have reviewed, the same errors recur:

• Timing: the K-1 for the old fund's final year arrives in September or later, after the UK 31 January payment date has passed. Estimated figures are used and never corrected.
• Treating "roll" as "no event": nothing reported in either country, when at least the UK and often the US had a disposal.
• Double counting: the gain is reported on the K-1 and again as a separate sale on Form 8949.
• Missing information returns: no Form 8865 for the contribution, no Form 8938 for the new CV interest.
• Foreign tax credit mismatch: UK CGT on a roll claimed in a US year with no US gain, so the credit is disallowed or carried in the wrong basket.
• Carry treated as ordinary investment gain: no section 1061 adjustment, and no UK carried interest computation.

How missed or incorrect election-year returns are prepared

Our process for a continuation-fund catch-up is document-led and runs both jurisdictions in parallel.

Step 1: assemble the deal record

We collect the election notice and form, the transaction summary or tender memorandum, the CV limited partnership agreement, the old fund's final K-1 and K-3, the CV's first K-1, any API statement, closing statements showing cash and fees, and the UK capital account statements. Where the sponsor issued a tax structure memo, that is usually the deciding document on whether section 721 applies.

Step 2: rebuild the US position

We identify the structure (contribution, sale and reinvest, or direct sale), compute outside basis, split capital and ordinary amounts, apply section 1061 where relevant, and determine which information returns were triggered. Errors on filed returns are corrected on Form 1040-X with the missing Forms 8865, 8938 or 8621 attached.

Step 3: rebuild the UK position

We compute the fractional-share disposal in sterling, using exchange rates on the relevant dates. The UK computes gains on sterling values, so currency movements alone can create or remove a UK gain. We then apply the correct rate or carried interest regime. A UK return can be amended online within 12 months of the 31 January filing deadline. After that, undeclared gains are normally corrected through HMRC's Digital Disclosure Service, and overpayments are claimed separately.

Step 4: reconcile double tax relief

We map each tax across both years and both countries so that UK CGT paid in a roll year is credited when the US gain arises, using carryover where it is available. This is where most of the money is recovered or lost.

Step 5: choose the right US correction route

If the issue is a single year with all information returns filed, an amended return is usually enough. If the election exposed wider non-compliance, such as unfiled FBARs, missing Forms 8938 or 8865 across several years, or unreported UK pensions or ISAs, the Streamlined Filing Compliance Procedures may be the better path. For a UK resident who qualifies as non-resident for US purposes and can certify non-willful conduct, the Streamlined Foreign Offshore Procedures cover three years of returns and six years of FBARs with no miscellaneous offshore penalty. Our IRS streamlined filing team handles that route, and the FBAR penalty calculator gives an early sense of exposure.

What if the K-1 shows something different from the election form?

The K-1 controls what the fund reported to the IRS, and the IRS matches it. If you elected to roll but the K-1 shows a full gain, the sponsor probably used a sell-and-reinvest structure, and the return should follow the K-1 unless the K-1 is wrong. In that case we ask the fund administrator for a corrected K-1 rather than filing an inconsistent return. Where an inconsistent position genuinely has to be taken, the IRS expects it to be disclosed on Form 8082. In the UK, there is no K-1 equivalent. Your return stands on its own computation, which is why the underlying deal documents matter.

Working with Jungle Tax

We prepare US and UK returns for American private-equity LPs, partners and fund executives living in the UK, with continuation vehicles, secondaries and carry as a regular part of the work. Our high-net-worth practice handles both returns as one engagement, so the US and UK computations for the election year are built from the same numbers. For a broader view of the dual-filing process, see our US-UK tax accountants page or browse related cross-border guides.

If you faced a roll-or-sell election and are not sure it was reported correctly on either side of the Atlantic, the sooner it is reviewed, the more options remain open. Contact our cross-border team for a confidential consultation. We will review your election documents and K-1s and set out exactly what needs to be filed or amended in each country.