Introduction: Why Directly Held Foreign Stock Is the Asset Your FBAR Never Sees
Directly held foreign stock is the most common gap we find when we rebuild the US filings of wealthy Americans in Britain. The reason is simple. Most people, and a surprising number of preparers, build Form 8938 by copying the FBAR. However, the FBAR only covers accounts, while Form 8938 also covers shares you own in your own name. As a result, a founder's stake in a UK company, a drawer of paper share certificates and employee shares left on a registrar's books all fall through the gap.
At TaxYork, we prepare US and UK returns for investors, bankers and company owners, and this single omission keeps whole tax years open for the IRS. Furthermore, it rarely shows up until a buyer's due diligence team, a lender or an IRS letter asks the question. This guide explains exactly what counts, how to value it, how to report it, what it costs when you miss it, and how to repair earlier years.
What Counts as Directly Held Foreign Stock
Directly held foreign stock means shares or securities issued by a non-US company that you own outside any account maintained by a financial institution. In practice, that covers shares registered in your own name on a company's register of members, certificated shares in a listed UK company, shares you hold as a personal member of the UK settlement system, and your shareholding in a private UK limited company. Notably, it also covers "any interest in a foreign entity", which is the statutory wording in section 6038D of the Internal Revenue Code.
The regulations confirm the point. Under Treasury Regulation 1.6038D-3, stock issued by a foreign corporation is an "other specified foreign financial asset" when you hold it for investment and not in an account. Therefore, the location of the shares matters as much as the shares themselves, and the same company can be reported as an account holding one year and as directly held foreign stock the next.
Why Wealthy Americans in Britain Hold So Much of It
High-net-worth clients accumulate directly held foreign stock in ways that ordinary savers never do. For instance, founders hold ordinary shares in their own company, angel investors hold minority stakes in several start-ups, and senior executives often leave vested employee shares on the company's register after they move on. Additionally, many long-term UK residents still keep paper certificates from share purchases made decades ago.
Each of these holdings can be worth hundreds of thousands of pounds. Consequently, they frequently push a filer over the Form 8938 threshold on their own, even when every bank and brokerage account sits comfortably below it.
How Directly Held Foreign Stock Differs From Shares in an Account
The distinction between an account and a direct holding decides which form catches the asset. The IRS sets it out plainly in its comparison of Form 8938 and FBAR requirements: foreign stock held directly is reportable on Form 8938 but not on the FBAR. Conversely, foreign stock inside a financial account is reported as part of that account, not as a separate asset.
Share Certificates and the Register of Members
When you hold a paper certificate, the company's registrar records you as the legal owner. No bank or broker sits between you and the shares. Therefore, there is no "account" for FBAR purposes, even though the registrar may pay your dividends by bank transfer and send you annual statements.
Private companies work the same way. Your name appears on the company's register of members, and the company files a confirmation statement with Companies House. Accordingly, your shareholding in a UK limited company is directly held foreign stock, whether the company is worth £50,000 or £50 million.
Nominee Accounts Versus Personal Membership
Most UK investors now hold listed shares through a platform's nominee company. In that case, the platform is a financial institution holding the shares for you in a custodial account. As a result, the nominee account goes on the FBAR and appears on Form 8938 as a financial account, with the shares inside it.
By contrast, a personal or sponsored membership of the UK electronic settlement system records the shares in your own name. Consequently, those holdings behave like certificated shares: they stay off the FBAR but belong on Form 8938 as directly held foreign stock. We regularly see clients who moved shares out of a nominee account to save platform fees without realising they had changed the reporting position.
Why the FBAR Rules Ignore Direct Holdings
The FBAR rules, administered by FinCEN under its report of foreign bank and financial accounts guidance, target accounts at financial institutions. A share you own directly is property, not an account. Hence, an FBAR can be perfectly correct while the tax return beside it omits a seven-figure holding of directly held foreign stock. That is precisely why a Form 8938 built from the FBAR list is almost always wrong for a company owner.
Private Company Shares: The Largest Asset Founders Forget
Founders and business owners carry the largest undisclosed values of directly held foreign stock we encounter. Specifically, the regulations treat an interest in a foreign entity as a specified foreign financial asset, so your shares in a UK company count even though you run the business day to day. The "held for investment" test only excludes an asset used in a trade or business that you carry on personally, and holding shares in a separate company is not the same as carrying on its trade.
How Form 5471 Interacts With Form 8938
If you file Form 5471 for the company, you do not need to list the shares again on Form 8938. Instead, you tick the Part IV box and state how many Forms 5471 you filed. However, the exception only applies for a year in which you actually file a timely Form 5471 that reports the asset.
Importantly, the Form 8938 instructions require a specified individual to include the value of those excepted assets when testing the threshold. In other words, a founder whose only foreign asset is a 60% stake in a UK company still counts that stake towards the $200,000 or $300,000 limit, and therefore still files Form 8938 even if Part VI is otherwise empty.
Minority Stakes Below the Form 5471 Line
A shareholding under 10% rarely triggers Form 5471 at all. Likewise, a 10% to 50% stake in a company that is not US-controlled only triggers Form 5471 in the year you acquire the 10% interest or otherwise cross a threshold. In every other year, no Form 5471 is filed. Consequently, the duplicative reporting exception disappears, and the shares must appear in full as directly held foreign stock on Form 8938.
Angel investors in SEIS and EIS companies sit squarely in this category. Each holding is small, but a portfolio of eight or ten stakes can easily exceed the threshold. Furthermore, each company needs its own Part VI entry with the issuer's name, address and class of share.
Options, Unvested Shares and Growth Shares
The Form 8938 instructions list options and other derivative contracts with a non-US counterparty among the assets to consider. Therefore, share options granted by a UK employer need a documented analysis each year, alongside any directly held foreign stock you already own, rather than an automatic omission. Unapproved options with no ready market value, EMI options and growth shares each raise different valuation questions, and we record our position in the workpapers so that it holds up on examination. For the income tax side of these awards, see our guide to UK employee share schemes and US tax.
Thresholds and Valuation Rules for Directly Held Foreign Stock
Form 8938 applies once the total value of your specified foreign financial assets passes a threshold. Moreover, that total includes both accounts and directly held foreign stock, so you must value everything before deciding whether to file.
The Thresholds for Americans Living in Britain
If you meet the bona fide residence or physical presence test, the higher "living abroad" thresholds apply. A single filer, or a married person filing separately, files when assets exceed $200,000 on the last day of the year or $300,000 at any time. A married couple filing jointly files when assets exceed $400,000 at year end or $600,000 at any time. By contrast, US residents face thresholds of $50,000 and $75,000 for single filers. The IRS confirms these figures in its basic questions and answers on Form 8938.
Notably, you only file Form 8938 if you must file an income tax return. However, almost every wealthy American in Britain has a filing requirement, so this exception rarely helps.
Maximum Value and the 52-Week High Rule
For assets held outside an account, you may generally use the value on the last day of the year. However, that shortcut fails if readily accessible information shows a higher value during the year. The instructions give an example of listed foreign stock worth $100,000 at year end whose 52-week high implies $150,000. In that case, the maximum value you report is $150,000.
Therefore, for certificated listed shares, you should check the year's high price rather than rely on the registrar's year-end valuation. We see this error in almost every self-prepared Form 8938 that includes listed directly held foreign stock.
Converting Sterling at the Correct Rate
You convert the maximum value of your directly held foreign stock into dollars using the US Treasury Bureau of the Fiscal Service rate for the last day of the tax year, even if you sold the shares earlier. The rates appear in the Treasury reporting rates of exchange. For 31 December 2025, the rate was 0.743 pounds per dollar, so £1,000,000 converts to $1,345,895.
Importantly, this is not the IRS yearly average rate you use for dividend income, which was 0.759 for 2025. Using the wrong rate for asset values is a small error on its own, but it undermines the credibility of the whole filing.
Valuing Private Company Shares
Private shares have no quoted price, so valuing this kind of directly held foreign stock needs a reasonable, verifiable estimate. The IRS allows you to rely on information from reliable financial sources or other verifiable sources. In practice, we use the price of the most recent funding round, a recent arm's-length share transfer, an independent valuation prepared for share scheme purposes, or the company's net asset value from its filed accounts, in that order of preference.
Additionally, we record which method we used and why. A defensible method applied consistently from year to year protects you far better than a precise-looking figure with no support.
Completing Form 8938 for Directly Held Foreign Stock
Once you know you must file, each item of directly held foreign stock needs its own entry in Part VI. Furthermore, the income it produces must appear in Part III, and the form must agree with the rest of your return.
The Part VI Entries
For each holding, you describe the asset and include the class or issue of the stock, for example "4,000 ordinary shares of £0.01 each". Next, you enter the date you acquired or disposed of it during the year, if either happened, and tick the box if you used a foreign currency rate. Then you give the maximum value, the name and address of the issuer, and the issuer's type, such as a foreign corporation.
If you hold more than one asset, you attach continuation statements. For a founder with several angel investments, those statements often run to several pages, so we build them from a maintained schedule rather than from memory each spring.
Reporting Income and Gains in Part III
Part III summarises the income and gains from your specified foreign financial assets and tells the IRS where each amount appears on your return. For instance, dividends from certificated shares go on Schedule B, while a disposal goes on Form 8949 and Schedule D. Consequently, the IRS can match the assets you disclose with the income you report, which is exactly why an asset omitted from Form 8938 so often coincides with income omitted from the return.
Joint Holdings With a Non-US Spouse
If you and a British spouse hold shares jointly and you file separately, you report the full value of the jointly owned stock on your own Form 8938. Many couples in our practice file separately because the spouse is not a US person. Therefore, jointly owned directly held foreign stock counts in full towards your threshold, not just half.
The Income Tax Side of Directly Held Foreign Stock
Reporting the asset is only half the job. In addition, the dividends and gains from directly held foreign stock are taxable on your US return, and they need matching UK treatment so that the foreign tax credit works.
Dividends From UK Companies
Dividends from UK companies are generally qualified dividends for US purposes, because the United Kingdom has a comprehensive income tax treaty with the United States. As a result, they are taxed at 0%, 15% or 20% federally. In Britain, from 6 April 2026 the dividend rates are 10.75%, 35.75% and 39.35%, after a dividend allowance of £500, as HMRC explains in its guidance on tax on dividends.
For most wealthy filers, UK tax exceeds the US tax, so the foreign tax credit removes the federal liability. However, the 3.8% net investment income tax remains. Following the Federal Circuit's August 2026 decisions, the treaty route to credit UK tax against the NIIT is closed, so that 3.8% is a real cost. Our US-UK tax treaty optimisation work focuses on keeping the credit position as efficient as possible.
Selling Certificated or Private Shares
When you sell, you compute the gain twice. For UK purposes, you apply the share-matching rules and pay capital gains tax at 18% or 24% after a £3,000 annual exempt amount, as set out in HMRC's guidance on tax when you sell shares. For US purposes, you use your dollar basis at the purchase-date rate, and currency movement alone can create a US gain or a loss.
Moreover, the US only sources an American's share gains to Britain where UK tax of at least 10% is paid or the treaty re-sourcing rule applies, so the credit calculation needs care. We cover the full mechanics of reporting in our guide to the UK general investment account and US tax, which applies equally to shares you hold directly.
Scrip Dividends, Rights Issues and Corporate Actions
Owners of certificated directly held foreign stock often receive scrip dividends, rights issues or demerger shares by post. Each event changes the shareholding, and several create US income or basis adjustments. Consequently, the number of shares on your Part VI entry must reconcile to the register each year, and any new holding from a demerger becomes a new asset with its own entry.
Penalties, the Open Statute and Fixing Missed Years
Missing directly held foreign stock from Form 8938 is not a technicality. Instead, it carries three separate consequences, and the third is the one that surprises clients most.
The Form 8938 Penalties
The failure-to-file penalty is $10,000 for each year. If you do not file within 90 days of an IRS notice, a further $10,000 applies for each 30-day period, up to an additional $50,000. Furthermore, if you underpay tax because of a transaction involving an undisclosed specified foreign financial asset, the accuracy-related penalty rises from 20% to 40% of the underpayment.
A reasonable cause defence is available for omitted directly held foreign stock, but you must show the facts affirmatively. Notably, relying on a preparer who never asked about direct holdings can support reasonable cause, but only if you gave them complete information.
Why the Whole Return Stays Open
Under section 6501(c)(8) of the Internal Revenue Code, the assessment period for a return does not close until three years after you supply the missing Form 8938 information. If the failure was due to reasonable cause, the extension is limited to the items related to the missing information. Otherwise, the entire return stays open.
In addition, if you omit more than $5,000 of income attributable to a specified foreign financial asset, the assessment period extends to six years. As a result, a single unreported shareholding can keep a decade of returns within the IRS's reach.
Correcting Earlier Years
The right fix for missing directly held foreign stock depends on whether tax is also missing. If every dividend and gain was reported and only the Form 8938 was incomplete, the IRS Delinquent International Information Return Submission Procedures allow you to file amended returns with the complete forms and a reasonable cause statement.
However, if dividends or gains were also omitted, the IRS Streamlined Filing Compliance Procedures usually offer the better route for non-wilful filers living abroad. Our IRS Streamlined filing service prepares three years of amended returns and six years of FBARs, with no offshore penalty under the foreign procedure. Moreover, amending gives you the chance to fix the UK side too, which matters when your UK returns missed the same dividends.
Case Study: A London Founder With $1.9 Million Outside Every Account
The following illustrative case study shows how the rules combine. Names and details are hypothetical, but the figures reflect the patterns we see in practice.
The Facts
Daniel is a single American who has lived in London since 2012. By 31 December 2025, he owned an 8% stake in a UK software company. Its 2025 funding round valued the whole company at £15,000,000, so his stake was worth £1,200,000. Additionally, he held paper certificates in a listed UK company worth £85,000 at year end, with a 52-week high of £97,000. He also kept vested shares in his former employer, a listed UK bank, on its register, worth £140,000.
Separately, Daniel had a UK brokerage account worth £310,000 and a current account holding £60,000. His previous preparer filed his FBAR correctly with both accounts. Form 8938 then listed the same two accounts and nothing else.
What Was Missing
At the Treasury year-end rate of 0.743, Daniel's directly held foreign stock was worth $1,615,074 for the private stake, $130,552 for the certificated shares at their 52-week high, and $188,425 for the employer shares. That is $1,934,051 of assets missing from Form 8938, compared with only $497,981 in the two accounts. In total, his foreign assets exceeded $2.4 million.
Furthermore, the registrars paid £9,100 of dividends a year on the two listed holdings straight into his current account. His preparer worked from the brokerage tax pack and never saw them. At the IRS average rate of 0.759, that is $11,989 of dividends a year missing from 2023, 2024 and 2025.
The Cost and the Fix
The UK tax Daniel paid on those dividends exceeded the US federal tax, so the foreign tax credit covered the regular liability. However, the 3.8% net investment income tax of about $456 a year was unpaid. More seriously, three incomplete Forms 8938 exposed him to $30,000 of failure-to-file penalties and left all three returns open indefinitely under section 6501(c)(8).
Because tax was missing and his conduct was non-wilful, we used the Streamlined Foreign Offshore Procedures. We filed three amended returns with complete Forms 8938, reported the dividends with foreign tax credits, and paid roughly $1,368 of tax plus interest. Consequently, Daniel faced no penalty, the statute began to run, and his sale of the software company eighteen months later passed the buyer's tax due diligence without a single question.
How TaxYork Can Help
TaxYork prepares complete US and UK returns for Americans with complex holdings, and we build every Form 8938 from a full asset inventory rather than from the FBAR. Specifically, we identify all your directly held foreign stock by tracing every share register entry, private company stake, option award and certificated holding, then value each one with a documented method.
Moreover, our US tax returns for expats service reconciles the dividends and gains from those assets with your UK Self Assessment, so both returns agree. Where earlier years are wrong, we prepare the corrective filings through the right procedure. For company owners, we also cover Form 5471 and the related filings described in our guide to missed US tax returns for UK company owners.
Conclusion
Directly held foreign stock is the asset class most likely to be missing from an otherwise careful US filing. The FBAR ignores it, preparers who copy the FBAR miss it, and yet Form 8938 requires it in full. Furthermore, founders, angel investors, executives with employee shares and long-standing UK investors all hold it in large amounts.
The consequences of omitting directly held foreign stock reach beyond a $10,000 penalty. Therefore, if your Form 8938 only lists bank and brokerage accounts, review it now. A complete inventory, valued at the correct maximum and converted at the Treasury year-end rate, closes the statute and protects any future sale, refinancing or move back to the United States.
Contact Us
If you own UK shares in your own name, a stake in a private company or certificates from years ago, we can review your position and prepare complete filings. Please book a consultation with our team, email hello@taxyork.com or call 020 3488 8606.
Disclaimer
This article provides general information about US and UK tax rules as they stood in September 2026 and does not constitute tax, legal or financial advice. Tax outcomes depend on your individual circumstances, and the rules, thresholds and exchange rates described here can change. You should obtain professional advice on your own position before acting. For professional standards and consumer guidance, see the Chartered Institute of Taxation, the AICPA and CIMA tax resources and MoneyHelper. For the underlying rules, see the Form 8938 instructions, HMRC's guidance on Capital Gains Tax, and Investopedia's overview of the Foreign Account Tax Compliance Act. TaxYork accepts no liability for actions taken on the basis of this article without a formal engagement.