Introduction: Why a Locked Box Sale Needs Two Tax Calendars
A locked box fixes the price of your British company at a balance sheet date that has already passed, and that single choice changes how both HMRC and the IRS tax your exit. Most guides to the mechanism come from corporate lawyers. They explain leakage, the ticker and the indemnity, and then they stop. None of them tells an American seller what the structure does to a UK tax return and a US tax return filed for the same sale.
That gap is expensive. Under a locked box, the buyer takes the economic risk and reward from a date months before completion. However, neither tax authority treats that date as the day you sold. HMRC looks at the contract. The IRS looks at closing. Meanwhile, a 2026 change to the US controlled foreign corporation rules now taxes you on company profits that the deal has already handed to the buyer.
At TaxYork, we prepare US and UK tax returns for American founders, investors and company owners in Britain. This guide therefore covers the ground the legal explainers leave out. It sets out the three dates that matter, the treatment of the ticker, the cost of permitted leakage, the new US charge on profits in the gap period, and a worked case study with real numbers.
How the Locked Box Mechanism Works
The Locked Box Date, the Accounts and the Fixed Price
A locked box sale sets the equity price by reference to a historic balance sheet, known as the locked box accounts. The buyer and seller agree cash, debt and working capital as at that date. Consequently, the price in the share purchase agreement is a fixed number, and nobody adjusts it after completion.
In contrast, a completion accounts deal uses an estimated price at completion. Accountants then draw up a balance sheet as at the completion date, and the price moves up or down pound for pound. That process often takes months and frequently ends in dispute. Sellers therefore tend to prefer the locked box route, and private equity sellers in London use it as standard.
Leakage and Permitted Leakage
Because the price is fixed at an earlier date, the buyer needs protection against value leaving the company afterwards. Leakage is any transfer of value from the company to the seller or the seller's connected persons between the locked box date and completion. Dividends, bonuses, management charges, waived debts and transaction fees paid by the company are the usual examples.
The seller gives a pound-for-pound indemnity against leakage. However, the parties also agree a list of permitted leakage, which the price already reflects. Ordinary salary is nearly always permitted. Furthermore, a pre-completion dividend is often permitted, provided the buyer has reduced the price to match. As you will see, that dividend is where many American sellers overpay.
The Ticker: Paying the Seller for the Gap
From the locked box date onwards, the company's profits belong economically to the buyer. Nevertheless, the seller does not receive the price until completion. The ticker compensates for that delay. Some deals express it as a daily profit accrual. Others express it as a percentage, commonly between four and eight per cent a year, applied to the equity price for each day of the gap.
The label matters far more for tax than most deal teams realise. Specifically, an amount described as extra price for the shares is treated very differently from an amount described as interest. The drafting therefore deserves attention from whoever prepares your returns, and that attention must come before signing rather than after.
Three Dates, Two Tax Authorities: When the Sale Happens
HMRC Uses the Contract Date Under Section 28
For UK capital gains tax, the disposal date is not the locked box date, and it is not necessarily completion either. Section 28 of the Taxation of Chargeable Gains Act 1992 fixes the disposal at the time the contract is made. If the contract is conditional, the disposal takes place when the condition is satisfied. HMRC confirms this in its Capital Gains Manual guidance on disposals under contract.
That rule decides which UK tax year your locked box gain falls into, which rate applies and when you pay. For example, Business Asset Disposal Relief carried a 14% rate until 5 April 2026 and an 18% rate from 6 April 2026. Accordingly, a seller who exchanged unconditionally in March 2026 and completed in June kept the 14% rate. A seller whose contract stayed conditional on a regulatory approval until June did not.
The point remains live. The Autumn Budget falls on 28 October 2026, and sellers in a signing process now should know which date fixes their rate. Importantly, a Budget can include anti-forestalling rules that override the general position for contracts signed shortly before a rate change, so the wording of each condition deserves a careful read.
The IRS Uses Closing
The US position differs. American tax law treats a sale as complete when the benefits and burdens of ownership pass to the buyer. In a share sale, legal title, voting control and the right to the price normally pass at closing. Therefore, the IRS will usually treat completion as the sale date under section 1001 of the Internal Revenue Code, even though the price was struck months earlier.
As a result, a deal that signs in December and completes in January sits in one UK tax year but straddles two US tax years. The UK gain belongs to the tax year of the contract. The US gain belongs to the calendar year of closing. Moreover, your UK tax becomes payable on 31 January following the UK tax year, which may fall in a different US year again. Foreign tax credit planning has to start from those three dates, not from the headline completion date.
Sterling, Dollars and the Exchange Rate
Your US return reports the gain in dollars. You translate the sale proceeds at the spot rate on the closing date and your share cost at the rate on the day you acquired the shares. Consequently, the dollar gain rarely matches the sterling gain. A founder who subscribed for shares when sterling stood at $1.60 and sells at $1.30 reports a smaller dollar gain than the UK figure suggests. The reverse also happens. The IRS explains its approach in its guidance on foreign currency and currency exchange rates.
How HMRC and the IRS Tax the Ticker
Extra Price or Interest: The Drafting Decides
HMRC has published no guidance aimed specifically at the locked box ticker. The treatment therefore follows general principles. Where the agreement defines the ticker as additional consideration for the shares, it forms part of your disposal proceeds. You pay capital gains tax on it at 24%, or 18% within any remaining Business Asset Disposal Relief allowance.
However, where the agreement describes the ticker as interest on the price, HMRC can treat it as interest. The case law on what counts as interest appears in HMRC's Savings and Investment Manual at SAIM2060. Interest is savings income, and an additional rate taxpayer pays 45% on it. The gap between 24% and 45% on a seven-figure ticker is a serious sum.
The US Treatment of the Ticker
The US analysis of a locked box ticker runs along similar lines. An amount paid for the shares increases your amount realised and qualifies for the 20% long-term capital gains rate, provided you held the shares for more than a year. In contrast, an amount that the agreement labels as interest is ordinary income, taxed at rates up to 37%.
Furthermore, the two countries do not have to agree with each other. A ticker that HMRC accepts as capital could still face a US challenge if the drafting talks about interest, and the reverse is equally possible. Consistent drafting, a consistent position on both returns and a clear paper trail protect you. In our experience, the sellers who face questions later are those whose agreement used both words interchangeably.
Leakage, Pre-Completion Dividends and Repayments
The Permitted Dividend Costs 39.35%
A pre-completion dividend in a locked box deal looks harmless on the deal model. The buyer reduces the price by the dividend, and the seller receives the same total. However, the tax result is not the same. HMRC's dividend tax rates for 2026/27 put the additional rate at 39.35%, against a capital gains rate of 24% on share sale proceeds.
Therefore, every £100,000 that leaves the company as a permitted dividend, instead of staying in the price, costs an additional rate seller £15,350 of extra UK tax. On the US side, the dividend should qualify for the 20% rate under the treaty, and the UK tax covers it. Nevertheless, the surplus UK tax becomes an excess foreign tax credit that you are unlikely to use. Leaving the cash in the company and taking it as price is usually the cheaper route.
Bonuses and Other Leakage
A transaction bonus paid to a seller who is also a director is employment income. It passes through PAYE at 45% plus employee National Insurance, and the company pays employer National Insurance at 15% on top. Additionally, the US taxes the bonus as wages. A locked box agreement that treats the bonus as permitted leakage has not made it tax efficient. It has simply stopped the buyer claiming it back.
When You Repay a Leakage Claim
Sometimes the buyer in a locked box sale finds leakage after completion and claims under the indemnity. The UK deals with the repayment through section 49 of the Taxation of Chargeable Gains Act 1992. You claim an adjustment, and HMRC recomputes the original gain as if the consideration had been lower. HMRC's manual sets out the mechanics at CG14805. The UK relief therefore travels back to the year of sale.
In contrast, the US generally gives relief in the year you repay. A repayment in a later tax year normally produces a capital loss in that later year, not an amended gain in the year of sale. Individuals cannot carry capital losses back. Consequently, a seller with no later gains can end up with a US loss that takes years to absorb, while the UK refund reduces the foreign tax credit already claimed. You must report that reduction to the IRS, usually on an amended return.
The 2026 US Rule That Taxes the Buyer's Profits in Your Hands
Section 951 No Longer Has a Last-Day Rule
This is the point no competing guide covers, and it is new. Most British companies owned by Americans are controlled foreign corporations. Until 2026, a US shareholder generally faced an inclusion only if they held the shares on the last relevant day of the company's year. A seller who exited before that day often escaped it.
That protection has gone. For company tax years beginning after 31 December 2025, section 951(a)(2) attributes a pro rata share of the company's income to any period in which you owned the shares. The same approach applies to net CFC tested income, the regime formerly known as GILTI. Proposed regulations on the pro rata share of subpart F income and tested income, published on 26 August 2026, would close the company's US tax year on the day it stops being a controlled foreign corporation. Comments on those proposals close on 26 October 2026, so the detail may still change.
Why the Locked Box Makes This Worse
Consider what that means in a locked box sale. From the locked box date, the profits belong to the buyer, and you receive only the ticker. However, you still own the shares until completion. The US therefore attributes the company's tested income for that period to you. Without planning, an individual pays ordinary rates of up to 37% on that income and receives no credit for the UK corporation tax the company paid.
In a completion accounts deal, you at least keep the profits that you are taxed on. Under a locked box, you are taxed on profits you have contractually given away. Your share basis does rise under section 961, which trims the capital gain. Nevertheless, that saving is often worthless, because UK capital gains tax credits already covered the US tax on the gain.
The Elections That Solve It
Two elections address the problem. The high-tax exclusion in Treasury Regulation 1.951A-2 removes tested income from the calculation where the foreign effective rate exceeds 18.9%. The UK main corporation tax rate of 25% clears that bar comfortably. Alternatively, a section 962 election lets an individual compute the tax as a corporation would and claim credit for the UK corporation tax.
Both elections attach to your US return for the year of sale. Furthermore, the high-tax exclusion applies to the company as a whole, so the sale agreement should state who makes it and oblige the buyer to supply the accounting information. Sellers who discover the issue the following spring often find that the buyer has no duty to help. In addition, the year of sale brings filings on Form 5471 and Form 8992, which need figures up to the completion date.
Foreign Tax Credits, Section 1248 and the 3.8% You Cannot Avoid
Making the UK Tax Count Against the US Bill
The UK taxes the gain at up to 24%, and the US taxes it at 20%. On paper, the UK tax covers the US tax in full. In practice, the credit only works if the gain counts as foreign-source income. Section 865 sources a share gain by the seller's residence, and a US citizen living in Britain qualifies as a non-resident for this purpose only where foreign tax of at least 10% of the gain is paid. UK capital gains tax at 18% or 24% meets that test. Additionally, the US-UK tax treaty contains a re-sourcing rule as a second line of defence. You claim the credit on Form 1116 in the passive category.
Section 1248 Turns Part of the Gain Into a Dividend
Section 1248 recharacterises gain on the sale of a controlled foreign corporation as a dividend, up to the company's accumulated earnings and profits. Those earnings include profits made during the locked box period, right up to completion. For most individual sellers this causes no extra tax, because a dividend from a UK company generally qualifies for the same 20% rate. However, the calculation requires earnings and profits figures in US terms, which UK statutory accounts do not provide.
The Net Investment Income Tax
The 3.8% Net Investment Income Tax applies to capital gains once your income exceeds $200,000, or $250,000 for a married couple filing jointly. Foreign tax credits do not reduce it. Therefore, on a share sale by a passive owner, 3.8% of the gain is a genuine additional US cost. An owner who works full-time in the business may be able to exclude some or all of the gain, and that analysis is worth doing before the return is filed.
Case Study: Daniel Sells a London Software Company for £12 Million
The following example is illustrative, and the facts combine features we see regularly. Daniel is a US citizen who has lived in London for twelve years. He owns all the shares in a UK software company, which he founded for a nominal £100. A UK-listed group agrees to buy the company on a locked box basis, using accounts drawn up to 31 December 2025.
The equity price is £12,000,000. The ticker runs at 6% a year from the locked box date to completion. The parties sign on 15 March 2026, conditional on a regulatory approval, which arrives on 20 June 2026. Completion follows on 30 June 2026, 181 days after the locked box date. The ticker is therefore £12,000,000 multiplied by 6% and by 181/365, which comes to £357,041. Daniel also took a permitted dividend of £200,000 in February 2026.
Start with the UK position. Because the contract was conditional, the disposal date is 20 June 2026, in the 2026/27 tax year. Daniel's proceeds are £12,357,041. After his £100 cost and the £3,000 annual exempt amount, the taxable gain is £12,353,941. He pays 18% on the first £1,000,000, which is £180,000, and 24% on the remaining £11,353,941, which is £2,724,946. His UK capital gains tax is therefore £2,904,946, due on 31 January 2028. Had the contract been unconditional in March, the 14% rate would have saved him £40,000.
Next, consider the drafting. The first draft of the locked box agreement called the ticker interest. At 45%, that wording would have cost £160,668 on the ticker, compared with £85,690 at 24%. Redrafting the clause as additional consideration for the shares saved £74,978. Similarly, the £200,000 dividend cost £78,700 at 39.35%. Left in the price, the same sum would have cost £48,000, so the dividend cost Daniel £30,700 more than it needed to.
Finally, the US position. Daniel's US gain arises on 30 June 2026, in his 2026 return. US tax at 20% on the sterling gain is roughly £2,471,388, and the UK tax more than covers it. However, the Net Investment Income Tax of 3.8% adds about £469,564, which no credit reduces. Moreover, the company earned £900,000 before tax between January and June 2026. After corporation tax of £225,000, the tested income of £675,000 is attributed to Daniel under the amended section 951. At 37%, the exposure was £249,750 on profits that belonged to the buyer. A high-tax exclusion election on his 2026 return removed it entirely. Getting the drafting and the election right was therefore worth more than £324,000 to him.
How TaxYork Can Help
We prepare both sides of a locked box company sale. Our team prepares the UK Self Assessment return reporting the disposal and the US Form 1040 with Schedule D, Form 1116, Form 5471 and Form 8992 for the same transaction. Because one team prepares both, the sale date, the ticker and the foreign tax credit line up on each return.
In addition, our US tax return preparation for Americans in Britain covers the controlled foreign corporation elections that the year of sale requires. Our foreign tax credit and treaty relief work makes sure the UK tax you pay reduces your US bill. Sale proceeds also create new reporting, so our FBAR and FATCA reporting service handles the FBAR filing with FinCEN and Form 8938 for the year the money lands. Sellers with missed US tax returns or a missed FBAR from earlier years should deal with those before the sale return goes in.
Related structures need the same care. Our guides to earn-out tax on a UK company sale, to the escrow account on a UK company sale and to Business Asset Disposal Relief and US tax cover the terms that often sit alongside a locked box deal. Professional bodies such as the ICAEW Tax Faculty and the Chartered Institute of Taxation publish further technical material.
Conclusion
A locked box gives you price certainty, and for that reason sellers rightly favour it. However, the mechanism creates three tax dates where a simple sale has one. HMRC taxes the gain when the contract becomes unconditional. The IRS taxes it at closing. Meanwhile, the profits of the locked box period belong to the buyer but, from 2026, sit on your US return.
Therefore, the tax work belongs in the negotiation, not in the following year's filing season. The locked box ticker should be drafted as price. Permitted dividends should be tested against the 39.35% rate. The agreement should deal with the high-tax exclusion election and the information you need for Form 5471. Above all, one team should prepare both returns from the same set of facts.
Contact Us
If you are an American owner selling a British company on a locked box basis, speak to us before you sign. You can book a consultation with our US-UK team, email hello@taxyork.com or call 020 3488 8606. We will review the sale terms from a tax return perspective and prepare your UK and US returns for the year of sale.
Disclaimer
This article provides general information only and does not constitute tax, legal or financial guidance for your circumstances. Tax rules, rates and proposed regulations change, and their application depends on the facts of each sale. The case study is illustrative. You should obtain professional help from a qualified US-UK tax specialist before acting on any information in this article. TaxYork accepts no liability for actions taken in reliance on this content.