Introduction: What Founders' Relief Means for American Founders in Britain
Founders' Relief is the new UK Capital Gains Tax relief announced at the Autumn Budget on 28 October 2026, which taxes qualifying share disposals by founders and significant early investors at 10% on up to £10 million of lifetime gains from 6 April 2027. For a British founder, the arithmetic is simple and generous. On a £10 million gain, the tax falls from roughly £2.4 million at the 24% main rate to roughly £1 million. Unsurprisingly, the first wave of commentary has focused on that £1.4 million headline saving.
However, a founder who is a US citizen or green card holder lives under two tax systems at once. The IRS taxes your worldwide gains regardless of where you live, and it gives credit only for UK tax actually paid. Consequently, every pound that Founders' Relief removes from your UK bill can simply reappear on your American return. In addition, a 10% rate sits exactly on a little-known threshold in the US Internal Revenue Code that decides whether your UK tax is creditable at all.
At TaxYork, we prepare US and UK returns for founders, investors and company owners on both sides of the Atlantic. This guide explains the conditions HM Treasury has published, why an American founder keeps less than a third of the saving a British co-founder enjoys, and how one routine UK allowance can turn Founders' Relief into a costly mistake. Finally, it shows how to structure the year of sale so the relief works for you rather than for the IRS.
Founders' Relief Explained: The Conditions Announced at Budget 2026
The government published its proposals in a technical consultation on Founders' Relief alongside an HMRC policy paper introducing the new founders relief. The consultation closes on 30 November 2026, and the government will legislate through amendments to Finance Bill 2026-27. Therefore, the detail may still change, but the core architecture is now clear.
Founders' Relief Individual Conditions
First, you must have held at least 25% of the company's ordinary share capital, with matching voting and economic rights, when the trade for which the company was formed began, or when preparations for that trade began. Second, you must have held the shares for at least five years before disposal. Third, and critically for internationally mobile founders, you must have been UK resident under the Statutory Residence Test for at least five continuous tax years before the disposal.
Notably, the relief is not limited to your original subscriber shares. The consultation states that it applies to all shares a qualifying individual disposes of, so shares acquired later, for example on the exercise of options, can benefit. Furthermore, the 25% condition can be met through the holding company of a trading group. Only individuals can claim, so shares held through a personal holding company or an entity treated differently in America need careful review.
Company Conditions and the Growth Tests
The company must be within the scope of UK Corporation Tax, with a substantial UK presence for the five accounting periods before disposal. It must be a trading company, or the holding company of a trading group, and it must still carry on the trade it was established for. Moreover, the excluded activities mirror the Enterprise Investment Scheme, so dealing in land, financial services and property development do not qualify.
In addition, the company needs turnover of at least £10 million and at least 15 qualifying full-time employees in the accounting period before disposal. A qualifying employee works at least 35 hours a week at no less than the National Minimum Wage, and directors, contractors and agency workers do not count. Finally, the company must pass two of three tests: 25% average compound turnover growth over three consecutive periods within the last ten years, 25% compound headcount growth over a similar window, or at least £1.5 million of qualifying R&D spending with R&D relief claimed within the three years before disposal.
The Lifetime Limit and the Cut to Business Asset Disposal Relief
The 10% rate applies to gains of up to £10 million per individual over a lifetime, and several co-founders can each claim on the same company. However, claims to Business Asset Disposal Relief and Investors' Relief made from 6 April 2027 reduce that £10 million limit. At the same time, the Budget 2026 overview of tax legislation and rates confirms that the lifetime limit for Business Asset Disposal Relief falls from £1 million to £500,000 for disposals on or after 6 April 2027. Special provisions will cover contracts signed before that date but completed afterwards, and certain share reorganisations.
HMRC expects only around 600 individuals a year to qualify for Founders' Relief, with an Exchequer cost of £260 million in 2027-28. In short, this is a relief for the founders of genuine scale-ups, which is precisely where American founders in London are heavily represented.
How the IRS Taxes a UK Share Sale by a US Citizen
The United States taxes its citizens and green card holders on worldwide income, so selling shares in a UK company produces a US capital gain as well as a UK one. Long-term gains face a top federal rate of 20%, as the IRS guidance on capital gains and losses explains. In addition, the 3.8% Net Investment Income Tax applies to gains on company shares once your income exceeds $200,000 if single or $250,000 if married filing jointly.
The Foreign Tax Credit Mechanism
To prevent double taxation, you claim a foreign tax credit on Form 1116 for the UK Capital Gains Tax paid on the same gain. The credit can only offset US tax on foreign-source income, and it can never exceed the UK tax actually paid. As a result, the US effectively charges the difference between its 20% rate and whatever lower rate the UK applies.
Importantly, the foreign tax credit reduces only regular income tax. The Net Investment Income Tax sits in a separate chapter of the Code, and the courts have consistently refused to let foreign tax credits reduce it. Therefore, the 3.8% charge survives whatever UK rate you pay, unless your income falls below the thresholds.
Why Any UK Rate Below 20% Funds the IRS
This produces the central insight that every UK-only analysis of Founders' Relief misses. When the UK charges 24%, the credit wipes out the 20% federal tax, and you pay 24% plus the 3.8% surcharge, a combined 27.8%. When the UK charges 10%, the credit covers only half of the federal tax, so the IRS collects the other 10%. Your total becomes 10% plus 10% plus 3.8%, which is 23.8%.
In other words, the relief cuts a British founder's rate by 14 points, but an American founder's rate by only 4 points. Similarly, Business Asset Disposal Relief at 18% already produces the same 23.8% total for an American, because the IRS simply tops up the difference to 20%. For a US citizen, therefore, the first £500,000 of gain costs exactly the same whether you claim BADR or Founders' Relief. Our earlier analysis of Business Asset Disposal Relief and US tax explains the same top-up effect in detail.
The 10% Sourcing Trap in Section 865(g)
The most dangerous feature of Founders' Relief for Americans is not the reduced saving. Instead, it is the precise rate itself. Under 26 U.S. Code section 865, gains on the sale of personal property, including shares, are generally sourced by the seller's residence. A US citizen living in London would normally be treated as a non-resident, so the gain would be foreign-source and the credit would work.
The At-Least-10% Rule
However, section 865(g)(2) adds a condition. A US citizen is not treated as a non-resident for a particular sale unless an income tax equal to at least 10% of the gain derived from that sale is actually paid to a foreign country. If the UK tax falls even fractionally below 10% of the gain, the gain becomes US-source. Consequently, the foreign tax credit limitation drops to nil for that gain, and you pay full US tax on top of your UK tax.
Before Budget 2026, this rule mattered mainly for gains sheltered by UK reliefs, losses or rebasing. Now the government has set a headline rate of exactly 10%. Accordingly, almost anything that trims your UK tax below the full 10% of the gain can push you over the edge.
How the £3,000 Annual Exempt Amount Breaks the Test
Consider the UK Capital Gains Tax annual exempt amount of £3,000. If you set it against your Founders' Relief gain, your UK tax becomes 10% of the gain less £3,000, which is £300 short of 10% of the whole gain. On a £9 million gain, you pay £899,700, which is 9.997% of the gain. That tiny shortfall fails section 865(g)(2), and the entire gain becomes US-source.
Brought-forward capital losses, incidental costs treated differently in each country, and exchange-rate movements can have the same effect. In particular, the US measures your gain in dollars, using the exchange rate when you acquired the shares and the rate when you sell. If the dollar gain is larger than the sterling gain translated at the sale date, the UK tax can fall below 10% of the US-measured gain even without any allowance. Therefore, you must test the threshold against the dollar figure on your US return, not the sterling figure on your UK return.
The Treaty Rescue and Its Paperwork
Fortunately, the US-UK income tax treaty contains a re-sourcing rule in Article 24 for US citizens resident in the UK. It deems income to arise in the UK to the extent necessary to avoid double taxation. You can rely on it to restore the credit, but you must disclose the position on Form 8833, and treaty re-sourced income goes into its own separate Form 1116 category. Furthermore, a missed Form 8833 carries its own penalty, so this is not a rescue to improvise in April.
The simpler fix is to plan around the trap. For example, you can allocate the annual exempt amount and any losses against other gains taxed at 18% or 24%, leaving your Founders' Relief gain taxed at a full 10%. Alternatively, if a disposal will exceed the £10 million limit, the excess taxed at 24% lifts the overall rate on that sale comfortably above 10%.
Section 1248, QSBS and Other US Rules That Change the Answer
Several US provisions interact with Founders' Relief in ways no UK commentary will mention. Each can change both the rate and the source of your gain, so we review all of them before any exit.
Controlled Foreign Corporations and Section 1248
If US shareholders owning at least 10% each together hold more than 50% of the company, it is a controlled foreign corporation. In that case, section 1248 treats part of your gain as a dividend, up to your share of the company's accumulated earnings and profits. Notably, a dividend from a UK company is foreign-source by definition, so that slice escapes the section 865(g) test entirely. Moreover, dividends from a treaty-country company generally qualify for the same 20% rate. You will also have been filing Form 5471 every year, and the earnings history on those forms drives the calculation. Our guide to the pre-sale dividend for American owners shows how earnings and profits shape a UK company sale.
Why QSBS Does Not Help a UK Company
American founders often ask whether the US Qualified Small Business Stock exclusion can wipe out the US tax instead. Unfortunately, section 1202 applies only to stock in a domestic C corporation. Shares in a UK limited company never qualify, however innovative the business. By contrast, a founder whose UK business sits under a Delaware parent may hold QSBS, but that parent will rarely meet the UK corporation tax and residence conditions for Founders' Relief on the same shares. Our article on QSBS for US founders abroad explores that conflict.
State Tax for Founders Who Kept a US Home
Most American founders resident in London pay no US state tax, which keeps the Founders' Relief arithmetic simple. However, founders who kept a home, a driving licence or voter registration in a high-tax state such as California may still be treated as state residents. State tax gives no credit for UK tax in many cases. Consequently, a residual state domicile can cost more than the entire Founders' Relief saving, so you should close state ties well before a sale.
Residence Timing: Arriving, Staying and Leaving
The five-continuous-year residence condition shapes the decisions of every internationally mobile founder. Unlike most UK reliefs, Founders' Relief rewards founders who stay, and it penalises recent arrivals.
Recent Arrivals From the United States
If you moved to London to scale a business you founded in America, you may hold 25% of a UK subsidiary or a UK-incorporated holding company. Yet you need five continuous tax years of UK residence before the disposal. A founder who arrived in 2024-25 cannot qualify before 2029-30 at the earliest. Furthermore, the relief requires the 25% stake when trading began, so a UK holding company created later through a share-for-share exchange needs careful analysis.
Leaving Britain Before an Exit
Some American founders plan to return home before selling. A UK non-resident generally pays no UK tax on gains from shares in a trading company. However, the temporary non-residence rules in section 10A of the Taxation of Chargeable Gains Act 1992 tax the gain on your return if you come back to the UK within five years. More importantly for Americans, leaving the UK simply hands the whole gain to the US at 23.8%, plus state tax wherever you settle.
Here is the counter-intuitive result. For a US citizen, Founders' Relief at 10% produces the same 23.8% total as living in Florida. Staying in the UK with the relief therefore costs no more than a move to a state with no income tax, while moving to California or New York costs substantially more.
Dual Nationals and Accidental Americans
Many founders discover their US citizenship only when an investor's due diligence asks about it. If you are a dual national US UK citizen or an accidental American, you face the same US tax on your exit as any other citizen. Furthermore, unfiled US returns, a missed FBAR on company bank accounts you control, and missed Form 5471 filings will all surface in the sale process. Therefore, regularise your position years before an exit, not weeks before completion, because a clean US history is what lets you enjoy Founders' Relief without surprises.
Case Study: A US Citizen Co-Founder Sells in 2028
The following illustrative case study uses figures typical of the clients we work with. Megan is a US citizen who moved to London in 2016. In 2019, she and a British co-founder, Tom, each subscribed for 40% of a new UK software company for a nominal sum, and an angel investor took the remaining 20%. By 2028-29 the company has £24 million of turnover, 120 full-time staff and three years of R&D claims, so it passes the company and growth tests.
The Sale and the British Co-Founder's Result
A buyer acquires the company in 2028-29, and Megan and Tom each realise a gain of £9 million. Both have been UK resident for more than five continuous tax years, so both qualify for Founders' Relief. Tom pays 10% on his gain after the £3,000 annual exempt amount, which is £899,700. Without the relief he would have paid about £2,159,280 at 24%. Consequently, Tom saves about £1,259,580.
Megan's Result If She Files Like Tom
Assume an exchange rate of $1.30, so Megan's gain is $11.7 million. For simplicity, we apply the 20% rate to the whole gain, although the 15% band trims the federal figure slightly. If Megan also uses her annual exempt amount against this gain, her UK tax of £899,700 is below 10% of the gain. The gain becomes US-source under section 865(g)(2), and no credit is available without a treaty claim.
Her US bill is then roughly $2,340,000 of federal tax plus $444,600 of Net Investment Income Tax, about £2,142,000 in total. Added to the UK tax, she pays around £3,041,700, an effective 33.8%. Remarkably, that is £539,700 more than she would have paid with no Founders' Relief at all.
Megan's Result With Proper Planning
Instead, Megan's advisers allocate her annual exempt amount to a separate gain on listed shares, so her UK tax is a full £900,000, exactly 10% of the gain. The gain stays foreign-source, and she claims a $1,170,000 credit against $2,340,000 of federal tax. She pays about $1,170,000 of federal tax plus $444,600 of Net Investment Income Tax, about £1,242,000. Her total is therefore around £2,142,000, an effective 23.8%.
Without Founders' Relief, Megan would have paid £2,160,000 of UK tax, with the credit eliminating the federal tax and only the surcharge of about £342,000 remaining, a total near £2,502,000. Her real saving is therefore about £360,000, less than a third of Tom's. Ultimately, the planning matters more than the relief: the difference between Megan's two outcomes is about £900,000.
Reporting and Compliance Around a Founder's Exit
An exit is the moment when every gap in your US compliance becomes visible. Buyers, banks and HMRC all ask questions, and the IRS gains a large figure to match against international information exchange. Moreover, a Founders' Relief claim invites HMRC to review the company's records as well as your own.
Forms for the Year of Sale
On the US side, you report the disposal on Form 8949 and Schedule D, claim the credit on Form 1116, and file Form 8833 if you rely on treaty re-sourcing. If the company was a controlled foreign corporation, the final Form 5471 must reflect the disposal and any section 1248 amount. Additionally, your sale proceeds usually land in a UK bank or investment account, which brings Form 8938 and the FBAR filed with FinCEN into play. Our FBAR and FATCA reporting service handles both.
On the UK side, you claim the relief in your Self Assessment return for the tax year of disposal. The consultation proposes a supplementary form and a statutory right to request evidence from the company. Accordingly, you should secure board cooperation on records of turnover, headcount and R&D claims well before you sign heads of terms.
Missed Filings Before an Exit
Founders who have not filed every US return, FBAR and Form 5471 face an awkward choice when a buyer asks for warranties. Missed US tax returns and missed reporting on company accounts can carry penalties that dwarf the Founders' Relief saving. Therefore, if you are behind, address the US tax returns for expats you have missed now, while you still control the timing and the narrative.
Planning Steps Before 6 April 2027
Founders' Relief does not start until 6 April 2027, but the Budget changes decisions you may take this winter. In our experience, the founders who benefit most start modelling 12 to 24 months before a transaction.
Decide Whether to Sell Before or After April 2027
If you qualify for Business Asset Disposal Relief but not for Founders' Relief, a sale before 6 April 2027 preserves the £1 million BADR limit. For a British seller, that is worth up to £30,000 more than a sale under the new £500,000 limit. For an American, however, the value is far smaller, because the IRS tops up BADR's 18% to 20% either way. Therefore, an American should not accept a lower price or a rushed process simply to beat the BADR cut.
Model Every Route in Both Currencies
Next, build your projections in pounds and dollars side by side. Test the section 865(g) threshold on the dollar gain, plan the use of your annual exempt amount and losses, and confirm whether section 1248 applies. Furthermore, consider whether part of your consideration will be deferred, earn-out or loan notes, because each country may tax those elements in different years. Our tax treaty optimisation service aligns the timing so credits are not stranded.
Respond to the Consultation
Finally, the consultation remains open until 30 November 2026, and responses go to HM Treasury. The design questions include the 25% threshold, the information rights and the anti-avoidance rules. American founders affected by the 10% sourcing issue may wish to ask for a rate structure that does not interact so precisely with US law. In our view, every American who may qualify for Founders' Relief should at least read the consultation questions. Our earlier pre-Budget CGT guide for Americans set out the background to these choices.
How TaxYork Can Help
TaxYork provides comprehensive US and UK tax preparation and compliance for founders, investors and company owners with cross-border lives. We prepare the UK Self Assessment claim for Founders' Relief and the matching US return in a single coordinated process. Specifically, we model the section 865(g) test in dollars, allocate allowances and losses to protect your credit, prepare Forms 1116, 8833, 5471 and 8938, and file your FBAR.
Moreover, if your exit has exposed missed US tax returns, missed FBAR filings or missed reporting on company accounts, we bring your history up to date before completion. As a result, you sign warranties with confidence and keep as much of your proceeds as both systems allow.
Conclusion
Founders' Relief is a substantial new incentive for UK founders, with a 10% rate on up to £10 million of gains from 6 April 2027. For a US citizen, however, the relief mainly transfers revenue from HMRC to the IRS. An American founder's combined rate falls from 27.8% to 23.8%, a 4-point saving rather than the 14 points a British co-founder enjoys.
Above all, the rate of exactly 10% interacts dangerously with section 865(g)(2). A routine £3,000 allowance can turn the gain US-source and leave you paying more than if you had claimed no relief at all. Therefore, plan the year of sale in both currencies, protect your foreign tax credit, and make sure every US filing is current before you sign.
Contact Us
If you are a US citizen or green card holder who may qualify for the new relief, book a consultation with our team before you agree terms. Email hello@taxyork.com or call 020 3488 8606 to speak with a US-UK tax specialist about your exit, your foreign tax credits and your US filing position.
Disclaimer
This article provides general information about UK and US tax rules as announced or in force on 28 October 2026 and does not constitute tax, legal or financial advice. The Founders' Relief proposals are subject to consultation and legislation and may change. Figures in the case study are illustrative and simplified. You should obtain professional advice tailored to your circumstances before acting. TaxYork accepts no liability for actions taken on the basis of this article.