Britain waits five years to tax it. America does not wait at all

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

Your employer offers free shares, and then matches anything you buy. Everybody in the office signs up, because the deal looks too good to refuse.

For your British colleagues it genuinely is. Hold the shares five years and no income tax ever arrives.

An American sits in a different position. A share incentive plan gives Britain a reason to wait and America no reason at all, so the two charges land years apart.

Key takeaways

• Britain taxes nothing where the shares stay in the plan five years.
• America taxes free and matching shares once forfeiture risk ends.
• Salary used to buy partnership shares stays taxable in America.
• Reinvested dividends count as income on an American return.
• The two countries give the shares different base costs.
• Credits earned in one year may be needed in another.
• The plan trust itself raises separate reporting questions.

What is a share incentive plan?

A tax-advantaged British scheme that lets an employer put shares into a trust for employees, with generous British tax relief if they stay there. For 2025-26 an employer can award up to £3,600 of free shares a year. Employees can buy up to £1,800 more from salary.

Matching shares come on top, up to two for every share you buy.

According to GOV.UK guidance on employee share schemes, shares held for five years leave the plan with no income tax or national insurance at all.

Why does America tax it earlier?

Because American law asks when the shares stop being at risk, not when they leave the plan. Once you can no longer lose them by resigning, the value counts as compensation. The British holding period is simply a condition for British relief, and it carries no weight in Washington.

So a plan designed around five years produces an American charge long before year five.

In our practice that gap surprises almost every new client who joins one.

A worked example

Take an illustrative example. An American in a London retail head office joins the plan in 2025.

She receives £2,000 of free shares that she forfeits only if she leaves within three years. She also buys £1,800 of partnership shares from salary and receives £1,800 of matching shares.

Britain taxes none of it that year. America taxes the £1,800 of salary she spent, because no American relief exists for the deduction.

Three years later the forfeiture risk ends. The free and matching shares then become American income at their value that day.

The two systems compared

What happens to partnership shares?

The purchase comes out of gross pay in Britain, which cuts your British tax and national insurance immediately. America ignores that deduction entirely, so the full salary stays on your return. You are buying shares with money already taxed once in American terms.

That is not a disaster, because it gives you a clean base cost in those shares.

Still, it means the headline saving is smaller for you than for the colleague at the next desk.

When exactly do free shares become taxable?

At the point you keep them whatever happens next, which usually means the end of the forfeiture period. Plans commonly set that at three years. Until then you hold something you could still lose, and American law waits for that risk to disappear.

Some plans forfeit only on dismissal for cause, which is a weaker condition.

Where the risk looks thin, the charge may arrive at the award date instead.

Can you elect to be taxed early?

You can, and in a rising market that election often pays. Electing within thirty days fixes the American charge at the award value, leaving all later growth as capital gain. Miss the deadline and no extension exists, which makes it an unforgiving rule.

The risk is obvious. If the shares fall or you forfeit them, you have paid tax on value you never received.

Our guide to share schemes across both systems sets out where the election fits.

What about dividend shares?

Dividends on plan shares usually buy more shares automatically, and Britain leaves them alone inside the plan. America treats the dividend as received the moment it is declared. Reinvestment changes nothing, because you directed where the money went.

So you report dividend income in years when no cash ever reached you.

Our guide to UK dividends on a US return covers the rate treatment.

Does the plan trust cause reporting?

Often, and this is the part advisers disagree about most. Shares sitting in a British plan trust can count as a foreign asset for American disclosure purposes once your holdings cross the threshold. Whether the trust itself needs reporting depends on how the plan documents read.

Our guide to Form 8938 reporting explains the asset side.

Ask your plan administrator for the trust deed rather than guessing from the employee booklet.

How do the base costs differ?

Britain gives you the market value on the day the shares leave the plan. America gives you whatever value it already taxed, which is usually earlier and often lower. Two different starting figures then produce two different gains on the same sale.

That is manageable provided somebody records both numbers at the time.

Years later nobody can reconstruct them, which is how real money gets lost.

What happens if you sell straight out of the plan?

Britain charges no capital gains tax where shares go directly from the plan to a sale, which is a genuinely useful rule. America still measures a gain against the value it taxed earlier. A short holding usually makes that gain small, though a strong year can make it meaningful.

Selling immediately also removes the currency problem before it grows.

Most of our clients in a share incentive plan sell on removal for exactly that reason.

Does the foreign tax credit solve the mismatch?

Partly, but timing undermines it. America taxes the shares in one year while Britain may tax nothing at all, so no British tax exists to credit. Later, when Britain does charge something, the American tax has already been paid years earlier.

Carrybacks and carryforwards help where other income generates spare credit.

Where your only British tax comes from salary, the credit rarely lands in the right basket.

What if you leave before the five years?

Britain then taxes the shares on withdrawal, with the charge depending on how long they sat in the plan. Leaving between three and five years gives partial relief in most plans. America usually has nothing further to tax, because it already caught the value earlier.

So an early exit produces the double charge in reverse order.

Good leaver provisions sometimes preserve the British relief, which is worth checking before resigning.

What if the shares are in a US parent company?

Plenty of British plans hold shares in an American listed parent, which simplifies one thing and complicates another. The shares themselves are American assets, so some reporting questions fall away. Withholding on the dividends then appears, and that interacts with your British return.

A completed treaty form with the broker keeps the withholding at the treaty rate.

Without one, the plan may deduct at the full statutory rate instead.

Does it affect the earned income exclusion?

The compensation element can qualify, because it rewards work performed in Britain. Awards vesting after you leave Britain are harder, since the exclusion looks at where you earned the value. Apportionment by workdays is the usual answer for shares that straddle a move.

Capital gains never qualify, so the sale itself stays fully taxable.

Keep the grant and vesting dates, because the apportionment depends on them.

How does a share incentive plan compare with options?

Options give you a right to buy later, so nothing is taxable until you exercise them. Plan shares arrive as real shares immediately, which brings the American charge forward. That makes the plan simpler in Britain and messier in America.

Our guide to EMI options for US citizens covers the option route.

Americans offered both sometimes prefer the option plan for that reason alone.

What does the currency do to the figures?

It adds a second moving part, because America measures everything in dollars while the plan runs in pounds. The award value converts at one rate and the sale proceeds at another. A flat share price can still produce a dollar gain or loss on its own.

Use the same conversion convention every year rather than picking whichever rate flatters the figure.

Our guide to exchange rates on a US return sets out the accepted approaches.

Should you join the plan at all?

Usually yes, because free and matching shares remain free money even after the American charge. A two for one match swamps any timing inconvenience. What changes for an American is the admin, not the arithmetic of whether the offer is worth taking.

The exception is somebody already near the top of both rate bands with no spare credit.

Even then the match normally wins, provided you plan the sale rather than drifting into it.

Does your employer withhold anything for America?

Almost never, because a British payroll has no mechanism for it and no obligation to try. Your employer deducts British tax where the plan rules require and stops there. The American liability lands entirely on you, usually through quarterly payments.

That catches people in the first vesting year, when a bill appears with no money set aside.

Our guide to estimated tax payments from the UK explains the schedule.

What records should you keep?

Keep the award statements, the forfeiture conditions, the dates risk ended and the share price on each of those dates. Those four items decide the American charge, and nobody can rebuild them from a year end statement later.

Also keep the dividend reinvestment notices, since each one is a small taxable event.

A simple spreadsheet updated annually beats a box of letters.

How to handle it on the return

1. List every award and the date its forfeiture risk ends.
2. Record the share price on each of those dates.
3. Add back any salary used to buy partnership shares.
4. Report reinvested dividends in the year declared.
5. Decide early whether an election on award suits you.
6. Track two base costs for every holding, British and American.
7. Check whether the holdings trigger foreign asset reporting.
8. Review the position again before you leave the employer.

Mistakes and penalties we see with a share incentive plan

The first is assuming the British five year rule protects you. It protects your colleagues.

The second is ignoring reinvested dividends because no cash arrived. They are income all the same.

The third is losing the vesting date prices, which leaves the American gain overstated on sale.

The fourth is missing the thirty day election window, which cannot be reopened afterwards.

How US UK Tax Accountants helps

We read the plan rules rather than the employee leaflet, because the forfeiture wording decides the American timing. Then we build the two base cost records that make a later sale straightforward.

Where an election makes sense, we flag the deadline before it passes. Our US federal returns service handles the reporting each year.

If your employer has just opened a plan and nobody mentioned American tax, get in touch before you enrol.

Last reviewed 12 October 2026. This article is general information and not personal tax advice. Plan rules vary between employers, so take advice on your own scheme.

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