Employment Related Securities: Why Two Tax Systems Watch the Same Shares
If you hold shares in your UK employer, you almost certainly own employment related securities, and two tax authorities are now watching the same asset. Furthermore, they measure it on different dates, at different values, in different currencies. Consequently, American executives and founders in Britain routinely pay tax twice on a single share award. Others simply lose a foreign tax credit they should have banked. At TaxYork we see this every filing season. Notably, the damage is almost always done within a fortnight of issue. Getting employment related securities right is a timing exercise first and a valuation exercise second.
Why Employment Related Securities Punish the Unprepared
The UK charge on employment related securities is not optional and it is not gentle. Specifically, the additional rate of income tax reaches 45%, and National Insurance sits on top. Meanwhile, the IRS applies section 83 to the identical shares on its own timetable. Therefore, the two systems can tax the same value in two different tax years. That mismatch is precisely how foreign tax credits get stranded.
Who This Guide Is Written For
We wrote this for high-net-worth Americans in Britain who receive real equity. Typically that means managing directors at London banks, partners in advisory firms, founders of UK companies and senior technology hires holding growth shares. Notably, the sums involved are large enough that a fourteen-day filing deadline can be worth six figures. Additionally, the compliance obligations attached to employment related securities extend well beyond the shares themselves.
What Counts as an Employment Related Security
Employment related securities are shares, options, debentures, loan notes, warrants or fund units acquired because of an employment. Moreover, the definition in the legislation is deliberately wide. HMRC sets out the whole regime in its employment related securities manual, and the breadth of it surprises most new arrivals.
The Deemed Employment Link Catches Almost Everyone
Section 421B of the Income Tax (Earnings and Pensions) Act 2003 creates a deeming rule. Under that provision, securities acquired where an employer or a person connected with an employer makes the opportunity available are treated as employment related. Consequently, founders who subscribe for their own company's shares are caught, as are directors who buy in at market value. In practice, the burden falls on you to prove the shares are not employment related securities. That argument rarely succeeds.
Restricted Securities and the Two Market Values
Most employment related securities carry restrictions. Leaver provisions, transfer restrictions, forfeiture on resignation and compulsory sale clauses are all common. Therefore, the shares have two values on day one. The actual market value reflects the restrictions, while the unrestricted market value ignores them. Importantly, if you pay only the actual market value, the untaxed difference does not disappear. Instead, it sits waiting, and HMRC collects it later as employment income rather than as a capital gain.
Why the Deferred Charge Is So Expensive
The deferred charge is proportionate, not fixed. Specifically, HMRC taxes the same percentage of your eventual sale proceeds that went untaxed at acquisition. As a result, a modest gap at the start becomes an enormous income tax bill after a successful exit. Furthermore, that charge attracts National Insurance and, for the employer, a 15% secondary contribution.
The Section 431 Election and Its Fourteen-Day Deadline
A section 431 election removes the deferred charge on employment related securities by taxing you upfront on the full unrestricted market value. Section 431 itself is short, but its effect is decisive. You accept a known charge now to convert all future growth into a capital gain.
How the Election Changes the Arithmetic
Once you elect, your base cost becomes the unrestricted market value rather than the price you paid. Subsequently, every pound of growth falls under capital gains tax at 18% or 24% depending on your band. Meanwhile, the annual exempt amount remains frozen at £3,000. Compare that with 45% income tax plus 2% employee National Insurance, and the case usually makes itself.
The Fourteen-Day Rule Is Absolute
You and your employer must sign the election within fourteen days of acquisition, and HMRC allows no extension. HMRC's guidance on the election confirms it cannot be made retrospectively and cannot be revoked. Moreover, you do not send the signed election to HMRC. Instead, you keep it and your employer reports it on the annual return. Consequently, elections are lost through filing-cabinet failures far more often than through bad advice.
When Electing Is the Wrong Answer
Electing creates a dry tax charge: real tax on paper value, with no cash proceeds to fund it. Therefore, an election on highly valued shares can be dangerous if the company later fails. Nevertheless, founders and early hires often acquire shares at a nominal unrestricted value. For them the upfront cost is trivial and the downside protection is enormous.
How the United States Taxes the Same Shares
The IRS ignores the UK analysis of employment related securities entirely. Instead, it applies its own rules under section 83 of the Internal Revenue Code. Consequently, your employment related securities produce US compensation income when the substantial risk of forfeiture lapses, valued in dollars at that date.
Section 83(b) and the Thirty-Day Window
A section 83(b) election accelerates the US charge to acquisition, taxing the spread between fair market value and what you paid. Furthermore, the governing regulation sets a strict thirty-day deadline, and the IRS now provides Form 15620 as a standardised election. Note the mismatch immediately: fourteen days in Britain, thirty in America. Accordingly, the UK deadline governs your timetable, because missing it cannot be cured.
Sourcing Employment Related Securities Income Across Two Countries
Income from employment related securities earned across a move is sourced by workdays between grant and vest. Similarly, HMRC apportions the charge for internationally mobile employees under section 41F and explains its method in the ERS international manual. Therefore, an award granted in New York and vested in London splits between two systems. That split then determines how much foreign tax credit you can actually claim.
The Trap Nobody Mentions: Capital Gains Are US-Sourced
Here is the point most articles miss entirely. For US purposes, gain on selling shares is generally sourced to your country of residence. For a US citizen, that means the United States. Consequently, the UK capital gains tax on that sale has no foreign-source income to sit against. The credit then fails. Fortunately, the US-UK double tax treaty contains a resourcing rule that can treat the gain as foreign source. However, you must claim it deliberately, on a separate re-sourced-by-treaty Form 1116, and disclose the treaty position. Otherwise you simply pay both.
Choosing Your Elections as a US Taxpayer
The right combination for your employment related securities depends on where your foreign tax credits already sit. Furthermore, the answer differs for a credit-rich banker and a cash-poor founder, so generic advice is worthless here.
Making Both Elections to Align the Timing
Filing both a section 431 election and a section 83(b) election aligns the two charges. Both then land in the same tax year on the same value. Consequently, the UK tax paid becomes creditable against the US tax arising on identical income. This is the cleanest outcome, and for most employees receiving employment related securities in Britain it is the recommended route.
Electing Only in the United Kingdom
Some advisers suggest a UK-only election, relying on accumulated excess credits to absorb the later US charge. Admittedly, that works where you consistently pay 45% UK tax against a 37% US rate. Nevertheless, it depends on having general-category credits available in the right year. Moreover, the choice between credit and deduction is not always free. In our experience, the strategy fails whenever the client's UK income drops or the shares vest after they leave Britain.
Why the Foreign Earned Income Exclusion Rarely Helps
Many clients assume the exclusion will shelter income from employment related securities. Unfortunately, the foreign earned income exclusion stands at $132,900 for 2026. A senior banker's salary consumes that before the equity is even counted. Therefore, high-net-worth filers should build their planning around credits, not exclusions.
Employer Reporting and the Sixth of July
Your company carries its own employment related securities obligation, entirely separate from yours. Specifically, employers must register each scheme and then file an annual return by 6 July following the tax year. HMRC's collected ERS guidance sets out the process.
Registration, Nil Returns and Penalties
Registration takes several working days, so leaving it until early July is reckless. Furthermore, once a scheme is registered, a nil return is required every year until you close it. HMRC issues an automatic £100 penalty for lateness. Further charges of £300 follow at three months and again at six months, with daily penalties thereafter. Moreover, a careless or deliberate inaccuracy can cost up to £5,000.
The Short-Term Business Visitor Change
From the 2025/26 tax year onwards, employers must consider short-term business visitors when preparing returns covering employment related securities. Consequently, an employee who worked in Britain for even a single day between grant and vest may need including. Notably, this catches American executives who commute to London periodically, and most US parent companies remain unaware of it.
What Directors Should Check Personally
Check that your section 431 elections are recorded on the return and that valuations are documented. Additionally, confirm that tax-advantaged schemes such as EMI or CSOP were notified correctly. Additionally, keep the signed elections yourself. Employers change payroll providers, and elections vanish.
Where Share Awards Meet FBAR and FATCA
Owning employment related securities frequently triggers reporting that has nothing to do with income tax. Moreover, these are the filings that turn a tax question into an enforcement problem.
When Employment Related Securities Sit in a Reportable Account
Shares held directly in certificated form are not a financial account. However, shares held through a UK broker, nominee or share plan account usually are. Therefore, you must file an FBAR with FinCEN once your foreign accounts together exceed $10,000. Importantly, that threshold is aggregate and unindexed, so a single vesting event can breach it.
Form 8938 and Specified Foreign Financial Assets
Directly held shares in a foreign company are specified foreign financial assets in their own right. Consequently, FATCA reporting on Form 8938 applies once you cross the relevant threshold. For a single filer living abroad, that threshold starts at $200,000 at year end. Furthermore, the penalty regime begins at $10,000 per year.
Catching Up If You Never Reported
Many clients discover these obligations years late, usually when a bank asks for a W-9. Fortunately, the IRS Streamlined Filing Compliance Procedures allow non-wilful taxpayers to file three years of returns and six years of FBARs without penalty. Our IRS Streamlined Filing service handles exactly this scenario. Notably, unreported employment related securities rank among the most common triggers we see.
Case Study: A London Managing Director With Growth Shares
Consider a client we will call Devlin, an American managing director who joined a London fintech in November 2025. They subscribed for 200,000 growth shares, paying the actual market value of £0.55 per share, or £110,000. Meanwhile, the unrestricted market value stood at £0.90, giving a £70,000 untaxed spread.
The Decision at Acquisition
Devlin signed a section 431 election on day nine and a section 83(b) election on day nineteen. Accordingly, the UK charged 45% income tax and 2% National Insurance on the £70,000, producing £32,900 payable through self assessment. Furthermore, the US recognised $91,000 of compensation at roughly $1.30 to the pound, generating $33,670 of federal tax at 37%.
How the Credit Worked
The UK tax of £32,900 converted to about $42,770 of creditable foreign tax. Consequently, the credit extinguished the entire US liability. Roughly $9,100 of excess general-category credit then carried forward for ten years. Therefore, Devlin paid nothing extra to the IRS on the award itself.
The Exit Four Years Later
The company sold in 2029 at £4.20 per share, returning £840,000. The section 431 election had fixed the base cost at £180,000. Therefore, the entire £660,000 uplift was a capital gain, costing £158,400 at 24%. Without the election, roughly 38.9% of the proceeds would have been employment income at 47%. That is about £326,700. Consequently, the total UK bill would have reached approximately £250,300. In short, two signatures saved close to £59,000 of UK tax. Furthermore, the treaty resourcing claim on Form 1116 protected the US side of the exit.
How TaxYork Can Help
We prepare US and UK returns for senior professionals holding employment related securities rather than simple salary. Specifically, we review award documents before the fourteen-day window closes. Furthermore, we model both election combinations against your actual credit position. We then prepare the resourcing claims that make those credits stick. Furthermore, our US tax return preparation for expats covers Forms 1116, 8938 and the FBAR alongside your Self Assessment.
Where awards vest across a move, we apportion the income properly rather than defaulting to the payroll figure. Additionally, our tax treaty optimisation service addresses the sourcing questions that determine whether your foreign tax credit survives IRS review. If earlier years were missed, our FBAR and FATCA reporting service brings the disclosure history into line.
Conclusion
Employment related securities reward speed and punish delay. Therefore, the fourteen-day section 431 deadline should govern your diary the moment an award is agreed, with the thirty-day US election following behind it. Furthermore, the sourcing and resourcing questions decide whether you claim relief or pay twice. Accordingly, build them into the return rather than argue them afterwards. Above all, treat the equity as a cross-border filing project from day one, because retrospective fixes rarely exist in this area of the legislation.
Contact Us
To review your share awards before a deadline closes, book a consultation with our cross-border team. Email hello@taxyork.com or telephone 020 3488 8606. We will then assess your elections, your credit position and your outstanding reporting together. Additionally, MoneyHelper offers general background on UK workplace benefits. The US Treasury's foreign tax credit rulemaking sets out the sourcing framework in detail. For a broader view of how equity fits your wider position, see our guidance on cross-border tax planning.
Disclaimer
This article provides general information about employment related securities and cross-border taxation. It does not constitute tax advice and you should not act on it without professional guidance specific to your circumstances. Tax legislation, rates and thresholds change. Furthermore, the treatment of share awards depends heavily on individual facts, residence history and scheme documentation. TaxYork accepts no liability for action taken in reliance on this article.