US Founder Selling a UK Company: Earn-Outs, Credits and Timing

US founder selling UK company: an introduction

A US founder selling a UK company pays tax on the same gain in both countries, and the UK tax normally counts against the US bill. The trouble is timing and character rather than rates. An earn-out can be taxed in the UK at completion, yet taxed in the US only as the money arrives. Meanwhile, part of the US gain may be recast as a dividend. This article shows how the two sides meet, and what to settle before you sign.

This article supports our guide for US and UK founders and executives. We prepare returns and do not advise on deal structure. The aim here is to show what each structure means for your filings.

When a US founder selling a UK company should start

Start before heads of terms if you can. Sale documents fix the form of the earn-out, and that form drives both tax results. Additionally, a buyer's due diligence may ask for your US filing history. If your Forms 5471 are missing, you want to know before the buyer does. Our article on back taxes for Americans in the UK covers getting up to date.

What will the UK charge on the sale?

The UK charges capital gains tax, at 18% on gains that qualify for Business Asset Disposal Relief and 24% for most other gains on shares at higher rates. These are the rates for disposals from 6 April 2026.

Business Asset Disposal Relief

GOV.UK sets out the relief, which has a rate of 18% for disposals from 6 April 2026. The lifetime limit is £1 million of gains. To qualify on shares, you must generally be an employee or officer and hold at least 5% of the shares and votes, for at least two years up to the sale. The company must also be a trading company or the holding company of a trading group.

Gains above the limit

Gains beyond that limit fall under the main capital gains tax rates. For 2026 to 2027, a higher rate taxpayer pays 24%. The annual exempt amount is £3,000, so it makes little difference on a sale of this size. The UK measures the gain in pounds.

The payment date

UK capital gains tax on shares is generally reported on Self Assessment. The balancing payment falls on 31 January after the tax year ends. A September 2026 sale therefore means payment by 31 January 2028. As you will see below, that date causes a real problem for US credits.

How does the US tax the same gain?

The US taxes a citizen on worldwide gains, usually as long-term capital gain at up to 20% plus the 3.8% net investment income tax. However, three US rules change the answer for a UK company.

Section 1248 and the dividend slice

If you held 10% or more of a controlled foreign corporation in the prior five years, section 1248 applies. It treats gain as a dividend, up to the company's untaxed earnings during your holding period. Earnings already included in your income under the CFC rules are generally left out. For an individual, section 1248(b) can cap the tax on that slice. Therefore, the amount needs a calculation from the company's earnings history, which is why accurate Forms 5471 matter.

Where the gain is sourced

Source matters because the foreign tax credit limit only covers foreign-source income. Under section 865, a citizen with a foreign tax home is treated as a non-resident for this purpose only if foreign income tax of at least 10% of the gain is actually paid. With 18% or 24% UK tax, you would normally pass. Nevertheless, a founder who is not UK resident at sale, or who has moved back to the US, needs fresh analysis.

Why QSBS does not help

American founders often ask about the qualified small business stock exclusion. Section 1202 defines a qualified small business as a domestic C corporation. A UK company is not domestic, so its shares do not qualify. A Delaware parent above the UK company is a different case and needs its own review.

The surcharge credits cannot touch

The 3.8% tax applies under section 1411. The regulations say foreign tax credits are not allowed against it. Some advisers argue that the treaty changes this result. That position is contested, so we model the sale with the 3.8% as a real cost and treat any treaty claim as a separate, disclosed decision.

Why is an earn-out the hardest part?

Because each country may recognise the same payment in a different year. Where the earn-out cannot be valued precisely, the UK and US methods pull apart.

The UK approach: tax the right now

Where a future sum cannot be ascertained, UK case law treats the right to it as a separate asset. HMRC's manual on unascertainable consideration traces this to Marren v Ingles. In practice, the right is valued and included in the sale proceeds. Later receipts are then treated as capital sums derived from that right. Consequently, you can pay UK tax on an estimate at the start, and more tax later if the right pays out above its value.

Shares instead of cash

A right that can only be settled in new shares or loan notes may qualify as an earn-out right under section 138A. HMRC's guidance on earn-out rights explains the conditions. If cash is possible, the section does not apply. This can defer UK tax, but the US view of those shares needs separate checking. A tax-free exchange in the UK is not automatically tax-free in the US.

The US approach: tax the cash later

The US default for a sale with deferred payments is the instalment method. For contingent payments, Regulation 15a.453-1 sets out how basis is recovered. With a stated maximum price, it uses a gross profit ratio on that maximum. You may elect out by the due date of the sale-year return, including extensions, and that election is generally irrevocable. Electing out brings the value of the earn-out into the sale year. That can line up better with the UK, although the cost is paying US tax earlier.

What does a worked example show?

Timing can matter more than rates. Consider a typical case, with invented figures, an assumed $1.30 rate throughout and a nil original cost, which keeps the sums simple.

The facts

Ella is a US citizen living in London who owns 60% of a UK trading company. In September 2026 she sells for £1.6 million of cash. Her buyer also agrees an earn-out, which a valuer puts at £200,000, payable in 2028. She has used no relief before. This example ignores section 1248, which would need the company's earnings history.

The UK computation

Her UK proceeds are £1.8 million, counting the valued right. Relief covers the first £1 million at 18%, costing £180,000. The other £800,000 at 24% costs £192,000. Her total UK tax is therefore £372,000, payable by 31 January 2028. That is about $483,600.

The US computation with the instalment method

On the instalment method, her 2026 US gain is only the £1.6 million cash, or $2,080,000. At 20%, that gives $416,000 of US tax, plus $79,040 at 3.8%. She files her 2026 US return long before she pays any UK tax. On a cash basis, she has no credit for 2026 and must fund the $416,000 herself. Her UK tax paid in January 2028 then generates a 2028 credit. Any excess can only go back one year and forward ten, under the rules in Publication 514.

The accrual election

A cash-basis taxpayer may elect to claim credits as they accrue. Under Regulation 1.905-1, a UK tax generally accrues at the close of the UK tax year, here on 5 April 2027. That falls in Ella's 2027 US year, not 2026. Therefore, the election alone does not rescue the 2026 return, though carrying back one year from 2027 can help. The election is also irrevocable. We would model each route side by side.

What should you check before you sign?

This sequence comes from reviewing what commonly goes wrong. It gives you a practical order of work.

First: fix the filing history

Check every Form 5471 and FBAR for your holding period. Our guide to Form 5471 for a UK company explains the form. The earnings and previously taxed amounts on those forms feed the section 1248 calculation. If returns are missing, read our IRS Streamlined Filing guide.

Second: model the earn-out both ways

Ask for a valuation approach for the earn-out early. Then work out US tax under the instalment method and with an election out. Compare the cash you must find in each year against when UK credits become usable.

Third: confirm BADR and US basis

Confirm that you meet the relief conditions for the full two years. Also, record your US basis in dollars at the original acquisition dates, since a US gain is measured in dollars. Currency movement alone can create a difference between the UK and US gains.

Fourth: set money aside

Hold back enough for US estimated tax in the sale year. The UK payment date may be 16 months after a September sale, but the US expects payment much sooner. In our experience, a US founder selling a UK company finds this cash-flow surprise the hardest part.

Which credit category does the gain fall into?

Usually passive, unless the high-tax rule moves it. That matters because credits in one category cannot shelter income in another. It is a technical point, yet it can decide whether a US founder selling a UK company uses all the UK tax.

The high-tax test

Publication 514 explains that passive income is high-taxed when foreign tax, after allocated expenses, exceeds the highest US tax that can be imposed on it. A gain taxed at 24% in the UK against a 20% US rate would generally pass that test and move to the general category. By contrast, a gain taxed at 18% under the relief would not. One sale can therefore split across two categories. Practitioners can reasonably differ on how to group the slices, so we document the method used.

The imputed interest slice

A deferred payment with no stated interest can contain imputed interest for US purposes, under section 483 or similar rules. That slice is ordinary income in the US. The UK, however, may treat the whole receipt as capital. Consequently, the same earn-out payment can carry two labels, and the UK tax on it may not match the US income neatly.

What if you leave the UK around the sale?

Moving does not necessarily take you out of UK tax, and it can damage the US credit. A US founder selling a UK company after leaving Britain should test both sides before relying on non-residence.

Temporary non-residence

The UK has temporary non-residence rules that can bring gains back into charge when you return within the set period. The sale may therefore be taxed in the year you come back. That creates yet another gap between the US gain and the UK tax.

The source rule again

If you pay no UK tax because you left, section 865 will generally source the gain to the US unless other foreign tax applies. In that case you have no foreign tax to credit, and the full US rate falls due. Moving to the US before completion also changes your tax home. Therefore, neither move is a simple fix, and the dates must go into the model.

What a US founder selling a UK company should record

Keep a dated note of your residence, your tax home and your working pattern for the two years before completion. A US founder selling a UK company relies on those facts for the relief, the source rule and any treaty position. Buyers rarely ask for this, so nobody else will gather it for you. A short file now avoids a difficult reconstruction when the returns fall due.

How US UK Tax Experts can help

US UK Tax Experts prepares and files both returns from one file, so the two agree. For a US founder selling a UK company, we work out the BADR claim, the section 1248 slice, the instalment figures and the foreign tax credit in each year. Our treaty relief service covers the credit and any treaty positions. We model outcomes both ways using your deal documents, and your lawyers and corporate advisers decide the structure.

Conclusion

The rates look similar, but the calendar is not. A US founder selling a UK company can owe US tax well before any UK credit exists, especially with an earn-out. Therefore, settle your filing history, model the earn-out both ways and reserve cash early. Once the sale agreement is signed, the choices narrow to elections on the return.

Contact us

If you are a US founder selling a UK company, or expect to be, email hello@usuktaxexperts.com or use our contact page. We reply within one working day.