US UK Accountants: Section 338(g) Election and the US Seller

When a US corporate buyer acquires a UK company it can make a section 338(g) election without the seller's consent. For US tax only, the company is treated as selling all its assets on the acquisition date. An American seller reports that deemed sale income on their final US return, while the UK return still shows an ordinary share sale.

That asymmetry is where returns go wrong. As US UK Accountants preparing both sides of a founder's exit, Jungle Tax sees the same pattern repeatedly: the sale completes, the UK capital gains computation is straightforward, and months later a notice arrives saying the buyer has elected under section 338. By then the seller's US return has often been drafted as a plain capital gain. This guide explains what the election does, how it reaches an individual American shareholder, what to ask for in the sale documents so the return can actually be prepared, and why HMRC is indifferent to all of it. It is written for return preparation, not for deal design.

What is a section 338(g) election, and why can the buyer make it alone?

Section 338 of the Internal Revenue Code lets a corporation that buys at least 80% of a target's shares by vote and value within a 12-month period (a "qualified stock purchase") treat the share purchase as an asset purchase for US federal income tax. The regular election under section 338(g) is made by the purchasing corporation alone, on IRS Form 8023, by the 15th day of the ninth month beginning after the month of the acquisition date. It is irrevocable. This is different from a section 338(h)(10) election, which needs the seller to join in and is not available for a typical foreign target.

With a UK target, the election is attractive to a US buyer because the deemed sale gain is not usually taxed to the company in the United States, yet the company's assets are reset to fair value for US purposes and its historic US tax attributes are cleared. The buyer gets a fresh start. The cost of that fresh start, where there is one, falls on any American who owned the shares immediately before completion.

What the election does to the UK company's final US tax year

• Deemed asset sale. "Old target" is treated as selling every asset at fair market value at the close of the acquisition date, and "new target" as buying them the following day.
• The US tax year closes. For US purposes the company's taxable year ends at the close of the acquisition date, even though its UK accounting period carries on.
• The gain belongs to the seller's period. Under Treasury Regulation section 1.338-9(b), the deemed sale gain and the earnings and profits it creates are taken into account in taxing the foreign target's shareholders, including for the controlled foreign corporation rules in section 951 and for section 1248. A person who sells shares to the buyer is treated as owning them at the close of the acquisition date.
• A price allocation exists somewhere. The deemed sale price is allocated across seven asset classes and reported by the buyer and target on Form 8883. The seller's inclusion is derived from that allocation.

How does the deemed asset sale reach an individual American shareholder?

It reaches you only if the UK company was a controlled foreign corporation (CFC) and you were a "United States shareholder", broadly a US person owning 10% or more by vote or value, directly, indirectly or constructively. A US citizen or green card holder who founded and controlled a UK limited company will almost always meet both tests. A US person with a small minority holding in a company that is not a CFC is generally outside these rules, although the passive foreign investment company regime should be ruled out separately.

Deemed sale income under the CFC rules

The gain on the deemed asset sale is income of the CFC in its final short year. It is sorted in the same way as any other CFC income:

• Gain on assets used in the active business, in practice mostly goodwill and other intangibles for a founder-led company, is generally tested income. Since the 2025 legislation the resulting shareholder inclusion is called net CFC tested income (NCTI), the regime formerly known as GILTI.
• Gain on assets that produce passive income, such as portfolio investments or certain shareholdings, can be subpart F income (foreign personal holding company income).

Both categories are included in the individual's gross income as ordinary income for the US tax year in which the company's short year ends. For an individual the inclusion is taxed at ordinary rates, currently up to 37%, with no automatic deduction and no credit for corporation tax the company paid. That is the heart of the issue: an amount the seller thinks of as long-term capital gain, taxed at 20%, can be reported instead as a CFC inclusion at ordinary rates.

Why 2026 sales are different: the "last day" rule has gone

Most published commentary on this topic was written in 2018 to 2020 and says the election matters because it closes the year and so makes the seller, not the buyer, the shareholder on the last day. That is now out of date. For CFC taxable years beginning after 31 December 2025, section 951 was amended so that a United States shareholder who owns shares on any day of the year includes a pro rata share for the period of ownership. Proposed regulations issued in August 2026 would generally use daily proration and close the year when CFC status changes; they are not yet final.

The practical consequence for a 2026 or later sale is that an American seller should expect to report a part-year share of the company's ordinary trading results whether or not an election is made. What the election adds is the deemed sale gain itself, which is usually far larger than a few months of trading profit.

The basis adjustment and the section 1248 dividend

Amounts included under the CFC rules increase the seller's basis in the shares under section 961. That reduces the gain on the actual share sale, so the same value is not taxed twice in the United States. Whatever gain remains is then tested under section 1248, which treats gain on CFC shares as a dividend to the extent of the company's earnings and profits accumulated while the seller held the shares and it was a CFC. Earnings already included in the seller's income under the CFC rules are excluded from the section 1248 amount.

For an individual, the section 1248 dividend from a UK company that qualifies under the US-UK income tax treaty is generally a qualified dividend, taxed at the same maximum 20% rate as long-term capital gain, and section 1248(b) caps the tax for individuals in certain cases. So the recharacterisation is often rate-neutral, but it still changes the lines on which the gain is reported, its foreign tax credit category and the earnings figures needed to support it. Our guide to section 1248 on the sale of a UK limited company covers that computation in detail.

An illustration of the reclassification

The figures below are simplified and for illustration only. Assume a sole American founder sells a UK CFC for $10 million, with a share basis of $1 million. The company's assets, almost entirely self-created goodwill, have a US tax basis of $2 million, and it has $1.5 million of earnings not previously included in the founder's income.

Item on the founder's US return	No election	Buyer makes a section 338(g) election
Deemed asset sale gain in the company	None	$8 million
CFC inclusion from the deemed sale (ordinary income)	None	Up to $8 million
Share basis after section 961 increase	$1 million	$9 million
Gain on the share sale	$9 million	$1 million
Of which section 1248 dividend	$1.5 million	Up to $1 million
Of which long-term capital gain	$7.5 million	Little or none

Total income is the same $9 million in both columns. The character is not. Without relief, $8 million moves from the 20% bracket to ordinary rates. Whether that happens in a real case depends on the two mechanisms below, which is why the return cannot be prepared from the completion statement alone.

What can soften the inclusion on an individual's return?

The section 962 election

An individual United States shareholder may elect under section 962 to be taxed on CFC inclusions as if a domestic corporation. The inclusion is then taxed at the 21% corporate rate, the section 250 deduction for tested income becomes available (40% for tax years beginning after 2025), and a deemed-paid credit can be claimed for UK corporation tax attributable to the income (90% of the relevant taxes for tested income from 2026). The election is made annually on the individual's return and has follow-on consequences for how later receipts from those earnings are taxed, so it needs modelling rather than a reflex tick. Note that the deemed sale gain carries no UK corporation tax, because the UK never taxed it; the credit comes only from tax on the company's real profits for the period.

The high-tax exclusion

Tested income taxed abroad at an effective rate above 90% of the US corporate rate, that is above 18.9%, can be excluded by election. With the UK main rate of corporation tax at 25%, many founders have relied on this for years. The final year needs fresh attention. The effective rate is measured for the year, and a large deemed sale gain with no UK tax attached can pull the rate for the short year below the threshold. A company that has been comfortably "high-tax" every year can fail the test in the one year that matters most. This point is fact-specific and should be confirmed against the regulations for your transaction.

Net investment income tax

The 3.8% net investment income tax generally applies to gain on the share sale and to the section 1248 dividend. CFC inclusions are treated differently unless a specific election under the section 1411 regulations was made in an earlier year. Moving income from the share sale to the inclusion therefore changes the Form 8960 computation as well, and the answer depends on the elections already on file.

How does the election affect foreign tax credits?

This is the point generalist commentary leaves out, because it is written for US corporate groups rather than for an American living in London.

A US citizen who is UK tax resident pays UK capital gains tax on the whole share gain. The United States, after an election, treats much of the same economic gain as a CFC inclusion. Three mismatches follow:

• Category. Foreign tax credits are limited separately for each category of income on Form 1116. UK capital gains tax is a tax on the share disposal. It does not automatically attach to a tested income inclusion, which sits in its own category with no carryback or carryforward.
• Source and character. Section 338(h)(16) provides that, for the seller's foreign tax credit limitation, the source and character of items are generally determined as if the election had not been made, apart from the section 1248 dividend computed without the deemed sale. The limitation and the income tax computation can therefore rest on different characterisations of the same gain.
• Timing. The US inclusion falls in the calendar year of completion. UK capital gains tax for a disposal in the 2026/27 tax year is due by 31 January 2028. Whether credits are claimed on a paid or accrued basis determines which US year the UK tax lands in.

The US-UK treaty contains re-sourcing provisions that may allow UK tax to be credited where the Code alone would not, with the position disclosed on Form 8833. Whether and how far that relieves an inclusion created by a section 338 election is not settled in published guidance that we can point to, and it should be reviewed on the facts. The separate disallowance in section 901(m) for "covered asset acquisitions" mainly affects the buyer's credits for later UK tax, not the seller.

Why is the UK return unaffected?

Section 338 is a fiction of US tax law. Nothing happens in UK law: the company does not dispose of its assets, its accounting period does not end, its corporation tax base costs do not change and no balancing adjustments arise. What the seller has done, as a matter of UK law, is sell shares.

For a UK-resident individual the disposal is therefore a chargeable gain on shares, reported on the Self Assessment return for the tax year of disposal at the capital gains tax rates then in force (18% and 24% for 2026/27, depending on the income band). Where Business Asset Disposal Relief is available, qualifying gains up to the £1 million lifetime limit are charged at 18% for disposals on or after 6 April 2026. HMRC does not ask whether an election was made and the UK return has no place to report one. An American seller who is not UK resident is generally outside UK capital gains tax on shares in a trading company, subject to the temporary non-residence rules and the rules for companies deriving their value from UK land.

Question	United States (IRS)	United Kingdom (HMRC)
What was sold?	Shares by the seller, and all assets by the company (deemed)	Shares only
Does the company's tax year end?	Yes, at the close of the acquisition date	No
Character of the seller's income	CFC inclusion, section 1248 dividend and residual capital gain	Capital gain on shares
Top rate on the main component	Up to 37% on an inclusion without relief; 20% on capital gain	24%, or 18% within Business Asset Disposal Relief
Is the seller's consent needed?	No	Not applicable
Where it is reported	Form 1040 with the CFC, Schedule D and credit forms	Self Assessment capital gains pages

What information should the seller ask for in the sale documents?

The seller cannot compute the inclusion from their own records, because it depends on figures the buyer controls after completion. The regulations do help: where the target was a CFC, the purchasing corporation must deliver a written notice of the election to each US person who sold shares, where the election affects that person's income under sections 951 or 1248, by the later of 120 days after the acquisition date or the day Form 8023 is filed. A notice arriving up to eight and a half months after completion is too late for an April filing, so the information should be secured contractually. For return preparation we ask clients to obtain:

1. A statement of whether an election will or may be made, for the target and for each subsidiary, since a separate election can apply to each company in the chain.
2. The acquisition date used for US purposes, and a copy of Form 8023 when filed.
3. The deemed sale price and its allocation by asset class, as reported on Form 8883, with any later revisions.
4. The company's US tax basis in its assets immediately before the deemed sale. Many UK companies have never kept US-basis records, so someone must be made responsible for producing them.
5. Final short-year figures under US principles: tested income, subpart F income, earnings and profits, previously taxed earnings, and UK corporation tax accrued to the acquisition date.
6. The seller's consideration analysed by type and date: cash, escrow and retention amounts, deferred and contingent amounts, loan notes and any rollover shares.
7. An ongoing information and cooperation undertaking, covering the period in which the buyer controls the company's books and the seller still has to file.
8. A deadline tied to the seller's filing dates rather than the buyer's.

Deferred consideration needs particular care. Later payments can increase the deemed sale price, so the inclusion for the completion year may need to be revisited when an earn-out crystallises. See our guide to earn-outs and loan notes on a UK company sale for how the two countries time that consideration. If you also received change-of-control payments as an executive, the separate rules in our guide to section 280G on a UK company sale apply alongside these.

How does this come together on the final-year US return?

Without going into the Form 5471 schedules, the individual's return for the year of sale typically brings together:

• the final information return for the company, covering the short year ending on the acquisition date;
• the tested income computation (Form 8992) and any subpart F inclusion;
• a section 962 election statement and the related corporate-rate computation, if elected;
• the share sale on Form 8949 and Schedule D, with basis increased for inclusions and the section 1248 portion reported as a dividend;
• Form 1116 by category, and Form 8833 where a treaty position is taken;
• Form 8960 for net investment income tax.

Because the inclusion is ordinary income arising on a single date, it can also disturb estimated tax payments for the year. Where the buyer's data will not arrive in time, an extension is normally the right course, with tax paid on a reasonable estimate. Our US tax services and UK tax services teams prepare the two returns together so that the credit claimed in one country matches the tax actually reported in the other.

If the sale has already been reported without the election

It is common to learn of the election after a return has been filed showing only a capital gain. The remedy is an amended return reflecting the inclusion, the basis adjustment and the revised credits. Where the company's information returns were never filed at all in earlier years, the catch-up should be planned as a whole; non-wilful cases may fit the IRS streamlined filing procedures. Delay rarely improves the position, since the buyer's own filings identify the election and the selling shareholders.

Common errors we see on seller returns

• Reporting the whole gain on Schedule D because the completion statement shows only a share price.
• Assuming the high-tax exclusion applies in the final year because it applied in every earlier year.
• Claiming UK capital gains tax as a credit against the tested income inclusion without analysing the category.
• Omitting the section 961 basis increase, so the same value is taxed as an inclusion and again as gain.
• Ignoring subsidiaries for which separate elections were made.
• Treating the UK return as needing adjustment. It does not.

Speak to a cross-border team before the return is drafted

A buyer's section 338(g) election is lawful, routine and outside the seller's control, but its effect on an American founder's final return is neither obvious nor small. The work is in obtaining the right figures, applying the available elections correctly and aligning the US credit position with the UK capital gains return. If you have sold, or are about to sell, a UK company to a US acquirer and want both returns prepared by accountants who work on both sides, please contact our cross-border team for a confidential consultation.