Zero tax in Britain. That is exactly what makes the US bill hurt

Figures relate to tax year 2025-26 (UK) · 2025 (US)

Your co-founder sells her half of the company to the staff and pays no capital gains tax at all. The relief is complete and entirely intended.

You do the same deal on the same day. America charges you on the whole gain.

The sting is not simply that America taxes an employee ownership trust sale. It is that Britain charges nothing, so there is no foreign tax to credit against the American bill.

Key takeaways

• Britain relieves the gain in full on a qualifying ownership trust sale.
• America gives no equivalent relief of any kind.
• Full British relief means no credit to offset the US charge.
• Deferred consideration may spread the American tax over years.
• An investment surcharge can apply on top of the main rate.
• The ownership trust itself raises separate reporting questions.
• Timing relative to citizenship or residence is the main lever.

What is an employee ownership trust?

A British structure where an ownership trust buys a controlling stake in a company and holds it for the benefit of all employees. Sellers of a controlling interest get full capital gains relief if the conditions hold. The ownership trust usually pays over several years from future profits.

According to GOV.UK guidance on the relief, the rules tightened from late 2024, including trustee residence and a longer clawback window.

The model has grown quickly among professional firms and manufacturers alike.

Why does the US charge bite so hard?

Because America taxes the gain in full and the foreign tax credit has nothing to work with. A credit offsets foreign tax actually paid, and a fully relieved British gain produces none. So the usual mechanism that protects cross-border sellers simply fails here.

For 2025 the long term rate reaches 20% before any surcharge.

That makes an American seller materially worse off than a British one on identical terms.

A worked example

Take an illustrative example. An American founder in Manchester sells a 60 per cent stake to an employee ownership trust in 2025 for £4 million.

Her base cost is negligible, so almost the whole amount is gain. Britain charges nothing under the relief.

America charges capital gains tax on the sterling gain converted to dollars, plus the investment surcharge on top. The combined rate reaches 23.8 per cent.

Her British partner on the identical deal pays nothing at all. The difference is close to a million pounds.

The two sellers compared

When is the American tax actually due?

Potentially over several years, because these deals rarely pay in cash on completion. Where consideration arrives in instalments, American rules can spread the gain across the years the money arrives. That matches the tax to the cash reasonably well.

An interest charge applies to larger deferred balances, and IRS guidance on sales paid in instalments sets out how the spreading works.

Electing out of the spreading is possible and occasionally sensible.

Does Britain tax the deferred amounts too?

The relief covers the whole disposal, so the timing question barely arises on the British side. What matters there is whether the conditions continue to be met. A clawback can undo the relief if the ownership trust loses its qualifying status.

That window now extends several years beyond completion.

So a British charge can appear years later, which changes the credit position too.

Can a later clawback help the US position?

Oddly, yes. If British tax eventually becomes payable, a credit may then exist against the American charge already paid. Recovering it means revisiting the earlier American year under the redetermination rules.

Our guide to foreign tax credit carryovers covers the mechanics.

Nobody plans for a clawback, but it is worth knowing the relief exists.

Is the trust a foreign trust for you?

Usually not for the seller, because the beneficiaries are the employees rather than the vendor. The position changes where the seller remains an employee and therefore a potential beneficiary. Then distributions can raise reporting questions of their own.

Our guide to Form 3520 and foreign trusts covers the reporting.

Read the ownership trust deed rather than assuming the vendor is excluded.

What about American employees of the company?

They are beneficiaries of a foreign trust, which is a position worth checking rather than ignoring. The annual bonus an employee ownership trust company can pay is income to them in both systems. Britain exempts it from income tax up to a limit.

For 2025-26 that limit stands at £3,600 per employee each year.

America taxes the whole bonus with no equivalent exemption.

Does the surcharge really apply?

To most sellers of this size, yes. The investment surcharge catches capital gains above the income thresholds and cannot be reduced by any foreign tax credit. On a large disposal it adds a further 3.8 per cent to the bill.

Our guide to the net investment income tax explains the charge.

Active participation in the trade does not exempt a share sale from it.

Can you structure around it?

Only in limited ways, and most of them involve timing rather than cleverness. Selling before becoming American, or after ceasing to be, removes the charge entirely. Spreading consideration manages cash flow without reducing the total.

Our guide to selling a UK business as a US person covers the wider options.

Anything promising to eliminate the charge deserves real scepticism.

Does expatriating before the sale work?

Sometimes, though the exit charge may capture the same gain anyway. A covered expatriate is treated as selling everything the day before leaving, which includes the shares. The calculation depends on valuations and the exclusion available.

Our guide to planning an expatriation date covers the sequencing.

The sums rarely work unless the move was happening anyway.

What about the currency?

America measures the gain in dollars using rates at acquisition and at each receipt. A sterling price that looks flat can still produce a dollar gain or loss. Deals paid in instalments carry that exposure across several years.

Record the rate applied to each payment as it arrives.

Reconstructing them afterwards is avoidable work.

Does it affect the company's American position?

It can simplify matters considerably. Before the sale an American founder with control creates controlled foreign company reporting. After it the ownership trust holds the majority, so that reporting usually falls away.

Our guide to Form 5471 categories covers who still files.

Check the year of sale carefully, since the position changes partway through it.

Who pays for the shares in practice?

The company does, through contributions to the trust out of future trading profits. That is why the money arrives slowly and why the deal depends on the business continuing to perform. A seller carries real commercial risk on the unpaid balance.

American tax on an instalment can fall due before the next one arrives.

Model the cash flow net of tax rather than gross.

What if the payments stop?

Then you have a bad debt question on both sides, and the two systems answer it differently. America may allow a loss against the gain already reported, while Britain has relieved the disposal anyway. Getting relief for tax paid on money never received is the hard part.

Document any renegotiation of the schedule carefully.

A variation agreed in writing is far easier to deal with than a default.

Does it matter where the trustees sit?

It does for the British relief, since the rules now require the trustees to be resident in Britain as a body. For American purposes the trustee residence affects whether the trust counts as foreign. The two tests ask different questions of the same facts.

An American trustee on the board can complicate both analyses.

Raise it before the trustee board is appointed.

Is a partial sale worth considering?

The British relief requires a controlling interest to pass, so selling a minority stake achieves nothing on that front. Americans sometimes ask about staging a sale across tax years to manage the rate. The control condition usually blocks it.

A single qualifying disposal with deferred payment is the normal answer.

That delivers the spreading without risking the relief.

What should you do before signing?

Model the American tax on the actual payment profile rather than the headline price. Deals are often agreed on a British net figure that leaves an American seller short. Knowing the number early changes what you negotiate.

In our practice this conversation happens too late more often than not.

By then the price and the schedule are both fixed.

Does the sale affect your UK residence plans?

It can, because instalments arriving after you leave Britain raise a fresh question about where the gain is taxed. The disposal happened while you were resident, so the British analysis is usually settled. The American one continues wherever you live.

Temporary non-residence rules can also pull a gain back into charge.

Take advice before moving while payments are still outstanding.

What records should you keep?

Keep the share purchase agreement, the payment schedule, every receipt with its conversion rate, and evidence of your original base cost. Those four items carry the whole American computation across what may be five or more years.

Keep the ownership trust deed as well.

It answers the beneficiary question if anybody ever asks.

How to plan the sale

1. Establish the base cost of your shares before anything else.
2. Model the American charge on the agreed payment profile.
3. Decide whether to spread the gain or elect out of spreading.
4. Check whether the surcharge applies at your income level.
5. Read the ownership trust deed to confirm you are not a beneficiary.
6. Negotiate the schedule with the American cash flow in mind.
7. Record the conversion rate on every instalment received.
8. Review the position annually while payments continue.

Mistakes and penalties we see with an ownership trust sale

The first is assuming the British relief helps you. It removes the very tax that would have given you a credit.

The second is agreeing a payment schedule without modelling the American bill against it.

The third is ignoring the surcharge, which adds 3.8 per cent and takes no credit.

The fourth is losing the conversion rates on early instalments, which overstates the gain on later ones.

How US UK Tax Accountants helps

We price the American charge before the deal is agreed, because the payment schedule is negotiable and the tax is not. That usually changes what a client asks for at the table.

Then we handle the spreading election and the annual reporting as the money arrives. Our business tax service covers the company side alongside it.

If a sale to your employees is under discussion, get in touch before the heads of terms are signed.

Last reviewed 16 October 2026. This article is general information and not personal tax advice. Transactions turn on their documents, so take advice on yours.