US Tax Return Preparation for Expats: Banker Buy-Out Awards

An American banker who moves between London employers and receives buy-out awards is taxed on each replacement tranche by HMRC as earnings from the new employer when it vests or is paid, and by the IRS when it becomes taxable under US rules. The two systems can source the same income differently, so each return must be reconciled tranche by tranche.

This guide covers the US tax return preparation for expats who receive replacement ("buy-out") awards on a move between London employers. It is written for investment bankers, traders and senior executives who give up unvested deferred bonus and share awards at the old firm and receive cash and share awards from the new firm that copy the forfeited vesting schedule, deferral and malus terms. We cover the UK side, the US side, the points where the two clash, the documents you need, and how to rebuild buy-outs in a multi-year catch-up where returns were never filed. This is about compliance and return preparation. It is not negotiating advice.

What is a buy-out award, and why does it create a two-country problem?

When a senior banker resigns, most unvested deferred awards at the old firm are forfeited under the leaver terms of the plan. A new employer that wants to hire the individual will normally "buy out" what is lost. It does this by granting new awards whose value, form (cash or shares), vesting dates, deferral and holding periods track the forfeited ones as closely as possible. UK regulatory remuneration rules for the banking sector push firms towards this mirroring. A buy-out generally cannot be more generous or faster-vesting than what it replaces, and it will usually carry malus and clawback terms.

For a UK-only taxpayer this is fairly simple: the replacement tranches are employment income from the new employer, taxed through PAYE when they vest or are paid. For a US citizen or green card holder, the same tranches are also taxable in the US, and three questions quickly become difficult:

• Timing. Is each tranche taxable in the US when granted, when it vests, when shares are delivered, or when cash is paid? And does that match the UK tax year in which HMRC taxes it?
• Source. Is the replacement pay for past services at the old firm, some of which may have been done in the US, or for future services at the new firm in London? The answer drives the foreign tax credit.
• Character. Is each replacement a restricted share, a restricted stock unit, a nil-cost option or a deferred cash promise? Each is treated differently in each country.

Mistakes here are expensive. An executive whose buy-out package runs to seven figures can end up with double taxation on the part of the award the IRS treats as US-source, or with inconsistent positions across tax years that are very hard to fix later.

How does HMRC tax buy-out awards from a new employer?

Earnings from the new employment, not compensation for loss of office

HMRC's settled view is that a payment made to persuade someone to take up an employment is taxable as earnings under section 62 ITEPA 2003. This applies when the new employer pays it, and can apply even when a third party pays it. The guidance on inducement payments and golden hellos (EIM00700) relies on case law holding that payments tied to a move between employers were earnings from the new employment. A buy-out fits this pattern. It is paid because you join the new firm, and it usually depends on you staying there.

The practical result is that the replacement award is not a termination payment. The £30,000 exemption for payments on loss of office does not apply to a buy-out from the new employer. HMRC's guidance does mention a narrow exception where a payment is truly for giving up an asset or a valuable right. Buy-outs that depend on continued service and are subject to the new firm's malus rarely fall within it. Payments from the old employer on departure are a separate matter and are analysed under their own rules. Keep the two streams apart in your records.

Securities option or restricted share? The character of each tranche

The UK tax treatment of a share-based buy-out depends on its legal form, not its commercial label:

• Restricted stock units and nil-cost options are rights to acquire shares in the future. HMRC generally treats them as securities options under Part 7 Chapter 5 ITEPA. There is no charge at grant. Income tax arises when shares are acquired on settlement, on their market value less anything paid.
• Restricted (forfeitable) shares are shares issued to you at grant that you lose if you leave early. They fall under Chapter 2. Where the forfeiture restriction lifts within five years, there is usually no charge at acquisition and the charge falls when the restriction lifts. Whether to make a joint section 431 election to be taxed on unrestricted value at the outset is a decision taken when the award is made. For preparation purposes you need to know whether one was made.
• Deferred cash buy-outs are simply earnings, taxed when paid.

Where the shares are readily convertible assets, as listed shares are, the new employer must run PAYE and Class 1 National Insurance on the vest through payroll. Deferred bonus shares are often net-settled or sold to cover. If PAYE is not recovered from the employee within the statutory window, the unrecovered tax can itself become a further taxable benefit. Check this on every vest.

Chapter 5B: does arriving from the US mid-vesting reduce the UK charge?

This is where many preparers go wrong. Since 6 April 2015, Chapter 5B ITEPA has taxed share-based income of internationally mobile employees by time-apportionment over a "relevant period". For restricted securities, that period generally runs from acquisition until the restriction lifts. For options, it generally runs from grant until vesting. HMRC's worked examples at ERSM162525 show each chargeable event having its own relevant period, running from acquisition to the lifting of that restriction.

The key point for buy-outs is that the relevant period is measured by the replacement award itself, not the forfeited award it copies. Suppose you moved from New York to London during the vesting period of your old awards and later joined a new London employer. The replacement's relevant period normally starts on the date the new firm granted it, and all of that period may fall after your arrival in the UK. So Chapter 5B will often give no apportionment relief on a buy-out, even though the award economically replaces pay earned partly in the US. There are two exceptions to keep in mind:

• If the replacement was granted before you became UK resident (for example on signing an offer while still based in the US), the relevant period can include non-UK days. The part attributable to those days may then fall outside the UK charge.
• If the old firm let you keep some awards as a good leaver, those original awards keep their original grant dates. Chapter 5B apportionment then applies to them in the ordinary way when they vest.

For recent arrivals, the reformed overseas workday relief that applies from 6 April 2025 may also matter for any non-UK workdays in the first four tax years of UK residence. It is subject to eligibility conditions and a cap, and it no longer depends on keeping funds offshore. It helps only with duties actually performed outside the UK.

How does the IRS tax buy-out awards?

Timing: section 83, constructive receipt and delivery

US timing turns on the same question of character, but the answers do not always match the UK's:

• RSUs and deferred share units are an unfunded promise, not property. The US does not tax them at grant or vest as property transfers. Income generally arises when shares are delivered, or when you are in constructive receipt of them, on their fair market value at that point. If delivery is delayed after vesting, US and UK timing can separate.
• Restricted shares actually issued to you are property within section 83. They are taxed when they become substantially vested, meaning transferable or no longer subject to a substantial risk of forfeiture, unless a section 83(b) election was filed within 30 days of the transfer. Malus and clawback provisions generally do not, on their own, amount to a substantial risk of forfeiture. Shares that are "vested but held" under UK regulatory remuneration rules may therefore be taxable in the US earlier than you expect.
• Cash buy-outs are taxed when paid, or when made available without substantial limitation.

Because the US tax year is the calendar year and the UK tax year runs from 6 April to 5 April, a single vest in, say, February falls in one US year and one UK year. A vest in May falls in a different UK year from a vest in March of the same calendar year. Map every tranche to both years before you start the return.

Section 409A and deferred cash buy-outs

A cash buy-out paid in instalments over several years is a promise of future pay. Section 409A can apply to it. Many arrangements fall within the short-term deferral exception because each instalment is paid shortly after it vests. Others do not. This is especially true where an amount is already vested but paid on a later fixed date, or where the paperwork gives the employer discretion over payment timing. The consequences of a 409A failure are severe: income inclusion when amounts vest, an additional 20% tax, and interest. So a deferred cash buy-out should be reviewed for 409A exposure rather than assumed to be compliant. Foreign plans can raise particular questions here. For return preparation, the main task is to spot the risk and report consistently with the plan terms, and to escalate where the structure is doubtful.

Source: past services at the old firm or future services at the new one?

This is the hardest question. Treasury Regulation 1.861-4 sources multi-year compensation on a time basis over "the period to which such compensation is attributable". That period depends on the facts and circumstances, and for stock options it generally runs from grant to vesting. The fraction is US workdays over total workdays in that period.

There are two reasonable readings for a buy-out:

• Future-services reading. The replacement is granted by the new employer, depends on continued employment there, and is subject to its malus. The attributable period is therefore grant-to-vest at the new firm. If all of that time is in London, the whole award is foreign-source.
• Past-services reading. The amount of the award is set by, and replaces, forfeited compensation for work done at the old firm. The attributable period could therefore arguably reach back into the old awards' vesting periods, which may include US workdays.

The difference matters mainly to executives who worked in the US during the forfeited awards' vesting periods. Under the past-services reading, part of the buy-out becomes US-source. UK tax paid on that part cannot be credited against US tax through the ordinary foreign tax credit limitation, because the limitation only allows credit against US tax on foreign-source income. Meanwhile HMRC, measuring from the replacement's own grant date, taxes the whole amount. The result is potential double taxation.

We usually document the future-services reading where the facts support it, which they often do because the award depends on service at the new firm. We keep workday records that would support either reading, and consider disclosure where the amount at stake is significant. In some cases the relief article of the US-UK treaty allows income the UK may tax to be re-sourced as foreign for credit purposes. That claim goes in its own Form 1116 category and generally needs a treaty-position disclosure. This is highly fact-specific and should be handled with care.

Foreign tax credit mechanics: basket and timing

Buy-out income is wage income, so UK income tax on it goes in the general category on Form 1116, together with your salary and bonus. The foreign earned income exclusion is rarely useful at this level of pay. It also cannot apply to amounts received after the end of the tax year following the year in which the services were performed, which some deferred tranches will be.

Timing mismatches are common. PAYE is withheld at vest, but UK liabilities are finalised on the Self Assessment return, with balancing payments due the following January. A cash-method taxpayer who claims credits in the year tax is paid can find UK tax landing in a different US year from the income. Electing to claim credits on an accrual basis, which cannot be reversed once made, often lines the two up better. Unused credits can generally be carried back one year and forward ten. UK National Insurance is not a creditable income tax. The US-UK totalisation agreement generally stops it being duplicated by US social security tax where you are employed by a UK employer.

Reporting the vests on Form 1040

A UK employer will not issue a Form W-2, but the income is still wages. Report the US-dollar value of each vest or payment as wage income on Form 1040, supported by your P60, payslips and vesting statements. Convert each tranche at the exchange rate for the vest or payment date, or apply the IRS yearly average rate consistently where appropriate. Then:

• Record each tranche's US tax basis (its fair market value when taxed) so that a later sale is reported correctly on Form 8949 and Schedule D. Without this, the gain is overstated.
• Match UK income tax withheld on each tranche to the correct US year on Form 1116.
• Include vested shares held in a UK nominee or brokerage account on Form 8938 and the FBAR where the thresholds are met. Regulatory holding periods often leave substantial balances in these accounts, and they are frequently missed.

US vs UK treatment of a buy-out at a glance

Issue	UK (HMRC)	US (IRS)
Nature of payment	Earnings from the new employment (s.62 ITEPA); not a termination payment	Compensation for services; wage income on Form 1040
RSU / nil-cost option replacement	Securities option; taxed on acquisition of shares	Unfunded promise; taxed on delivery or constructive receipt
Restricted share replacement	Usually taxed when forfeiture restriction lifts (unless s.431 election)	Taxed at substantial vesting under s.83 (unless 83(b) election)
Deferred cash replacement	Earnings when paid; PAYE and NIC	Taxed when paid; s.409A review required
Cross-border apportionment	Chapter 5B relevant period runs from the replacement's own grant	Time-basis sourcing over the period to which pay is attributable (facts and circumstances)
Withholding / payment	PAYE and Class 1 NIC via new employer's payroll	No US withholding by a UK employer; estimated tax payments may be needed
Tax year	6 April to 5 April	Calendar year
Double tax relief	Primary taxing right on UK-duty income	Foreign tax credit, general category, Form 1116; treaty re-sourcing in limited cases

Documents to gather before preparing the return

Buy-outs can only be reconstructed properly from primary documents. Before any return is prepared, assemble:

• The offer letter and buy-out schedule from the new employer, showing each replacement tranche, its form, grant date, vesting date, holding period and malus/clawback terms.
• Plan rules and award certificates for each replacement plan, so the legal character of each tranche (RSU, option, restricted share, cash) can be confirmed.
• Forfeiture confirmations from the old employer listing the awards lost, their original grant dates and vesting schedules. These support the sourcing analysis and show that nothing forfeited was also taxed.
• Vesting and release statements for every tranche, showing shares released, shares sold or withheld to cover tax, market value and the UK tax deducted.
• P60s, P45s, final payslips and P11Ds from both employers for each UK tax year involved.
• Any section 431 or section 83(b) elections, with evidence of when they were filed.
• A workday calendar (travel records, diary, expense data) covering the old awards' vesting periods and the new awards' grant-to-vest periods, split between US, UK and other locations.
• UK Self Assessment returns and calculations, so UK tax can be tied to specific income for credit purposes.
• Nominee and brokerage statements for accounts where vested shares are held, including year-end and maximum balances for FBAR and Form 8938.

Reconstructing buy-outs in a multi-year catch-up

We often see bankers who kept their UK affairs in order through payroll and Self Assessment but never filed US returns, or who filed returns that left out share vests altogether. If that is you, the buy-out years need to be rebuilt carefully, because they are usually the highest-income years in the compliance period.

Step 1: choose the compliance route

For non-willful US taxpayers living abroad, the Streamlined Filing Compliance Procedures, including the Foreign Offshore Procedures, generally require the last three years of delinquent or amended returns and the last six years of FBARs, together with a certification of non-willful conduct. Where the eligibility conditions are met, the foreign offshore route carries no miscellaneous offshore penalty. Our IRS streamlined filing team can assess eligibility before any documents go to the IRS.

Step 2: build a tranche ledger

List every replacement tranche and every good-leaver award that vested in the period. For each, record grant date, vest date, delivery or payment date, legal form, number of shares, market value, sterling amount, exchange rate, US-dollar amount, UK tax year, US tax year and UK tax withheld. This one ledger then drives the Form 1040 wages, the Form 1116 credits, the basis records and the FBAR balances, so the years stay consistent with one another.

Step 3: fix the sourcing position once

Decide the attributable period and sourcing approach for the buy-out, document the reasons, and apply it the same way across every year. Changing positions from year to year, for example treating one tranche as foreign-source and a similar one as partly US-source, is a common weakness in self-prepared catch-ups.

Step 4: reconcile to the UK returns

Match the income on your P60s and Self Assessment returns to the ledger. Differences usually come from net settlement, delivery delays, or share-sale proceeds that were wrongly treated as income. If the UK side has errors of its own, such as a missed Self Assessment return or an unreported brokerage account, deal with them alongside the US filings. Our UK tax team can handle that in the same engagement.

Step 5: finish the information returns

Prepare FBARs and Forms 8938 for every year in which nominee accounts, sale proceeds or cash buy-outs pushed balances over the thresholds. If you are worried about exposure from years already missed, our FBAR penalty calculator gives a first indication before you speak to us.

Common errors we correct

• Treating the whole buy-out as non-taxable in the US because UK PAYE was deducted.
• Claiming the foreign earned income exclusion on deferred tranches received outside the permitted window.
• Recording no US basis for released shares, so the full sale proceeds are taxed again on disposal.
• Assuming shares under a regulatory holding period are unvested for US purposes.
• Applying Chapter 5B apportionment to a replacement award as if it had the forfeited award's grant date.
• Leaving the nominee account holding the vested shares off the FBAR.

Why specialist preparation matters at this level

Buy-outs sit where employment income, share plan law, sourcing rules and treaty relief all meet, and they are rarely one-off. A banker who moves once may have replacement tranches vesting across four or five US and UK tax years, each needing the same treatment. At Jungle Tax we prepare the US and UK returns together, so the income, credits and positions reconcile on both sides. Our high-net-worth practice regularly handles multi-year equity histories for senior financial services professionals.

If you have changed firms in London and your buy-out awards have not yet been reported correctly to the IRS, or you have years of unfiled returns to regularise, contact our cross-border team for a confidential consultation. We will review your offer letter, vesting history and filing position, and set out a clear, defensible plan to bring both sets of returns fully into line.