Introduction: Section 267 and the Loss That Disappears
Section 267 deletes the loss when you sell an asset to someone the tax code treats as related to you, and an American in Britain usually walks into it from two directions at once. Consequently, a transaction that looks like sensible housekeeping meets Section 267 head on, destroying relief permanently in America while Britain simultaneously ring-fences the same loss. The rule is mechanical, not judgemental. Instead of asking whether you had a commercial motive, it simply asks who bought the asset.
At TaxYork, we see the damage after the event rather than before it. Typically, a client transfers a holding into a personal company or across to a spouse, expecting to bank a loss against other gains. Unfortunately, the loss has already gone by the time the question reaches us.
What Section 267 Actually Does
Section 267 denies any deduction for a loss on a sale or exchange of property between related persons. The disallowance is permanent for the seller, and no election, timing change, or later transaction restores it. Furthermore, the rule applies whether or not the price was genuinely at arm's length.
There is one narrow carve-out. The Section 267 prohibition does not apply to a loss of the distributing corporation or the distributee in a distribution in complete liquidation. Otherwise, the statute is absolute, and the codified text in the United States Code has stood substantially unchanged for decades. The IRS covers the practical consequences in Publication 544 on sales and other dispositions of assets.
Why Americans in Britain Meet Section 267 So Often
Wealthy Americans in London hold assets through personal companies, family investment structures, and joint accounts with a British spouse far more often than their domestic counterparts. Consequently, the related-party universe is larger, and the chance of triggering the rule accidentally is much higher.
Moreover, Britain has its own connected-persons regime that bites on the same transaction with a different mechanism. Therefore, the practical result is often no usable relief in either country, from a single transfer that was meant to help.
Who Counts as Related Under Section 267
The definitions decide everything, and they are narrower than most people assume in one direction and wider in another.
The More Than 50 Per Cent Company Test
An individual and a corporation are related where the individual owns, directly or indirectly, more than half the value of the outstanding stock. Consequently, the sole owner of a UK limited company is always related to it, and so is a founder holding 51 per cent alongside outside investors.
Section 267 measures ownership by value, not by voting rights. Additionally, the test looks through to indirect holdings, so a company held beneath another company still counts. Our guide to US tax on a UK limited company explains how those structures are classified in the first place.
Constructive Ownership Pulls In People You Forgot
Section 267 attributes stock owned by an entity proportionately to its owners, and Section 267 also attributes stock owned by family members directly to you. Family for this purpose means brothers and sisters, whether by whole or half blood, your spouse, your ancestors, and your lineal descendants.
Notably, that list stops there. Uncles, aunts, nieces, nephews, cousins, and in-laws are simply not family for Section 267 purposes. Consequently, a sale to your brother-in-law is not a related-party sale in American terms at all.
The British Definition Is Wider Than the American One
Here is the asymmetry that catches people. Britain treats you as connected with your spouse or civil partner, with your relatives, with the spouses of those relatives, and with the relatives of your spouse. The statutory definition of relative in section 286 of the Taxation of Chargeable Gains Act 1992 covers brother, sister, ancestor and lineal descendant.
Therefore, a sale to your brother-in-law is connected for HMRC and unrelated for the IRS. Meanwhile, the reverse never happens, because everyone related under Section 267 is also connected in Britain. Accordingly, the British net is strictly the wider of the two.
How Britain Attacks the Same Transaction
The United Kingdom does not disallow the loss outright. Instead, it does something subtler and, for a cross-border filer, almost as damaging.
Market Value Replaces Your Actual Price
Transactions between connected persons are deemed to take place at market value under section 17 and section 18 of the Act, which is where Section 267 and the British rules first diverge. Consequently, the price you actually agreed is irrelevant for British capital gains purposes, and an artificially low sale to crystallise a bigger loss achieves nothing.
That deeming rule cuts both ways. Furthermore, it applies to acquisitions as well as disposals, so the buyer takes a market value base cost regardless of what changed hands.
The Clogged Loss Rule in Section 18
A loss on a disposal to a connected person becomes what practitioners call a clogged loss. Specifically, it can be set only against gains on other disposals to that same connected person, arising while the connection still exists. HMRC sets out the mechanics in its capital gains manual, and the limitations on the operation of the rule appear separately.
Practically, that condition is almost never satisfied. Most people never make a second, profitable disposal to the same connected person, so the clogged loss sits unused indefinitely. Consequently, the British outcome resembles Section 267 disallowance even though the statute stops short of it. The general rules on using capital losses confirm that an ordinary loss faces no such restriction.
Two Systems, Two Mechanisms, One Result
Britain ring-fences the loss and America deletes it. The mechanisms differ, yet a US person in London who sells shares to their own company at a loss generally ends up with nothing usable on either return.
Nevertheless, the two rules do not overlap perfectly, and the gaps between them are where planning survives. Therefore, the analysis has to run in both systems before the transfer, not afterwards.
The Section 267(d) Benefit Goes to the Buyer, Not to You
This is the detail that surprises clients most, and it matters enormously when the buyer sits outside the American tax net.
How the Restoration Rule Works
Where property bought from a related party at a disallowed loss is later sold at a gain, that gain is recognised only to the extent it exceeds the previously disallowed loss. Consequently, the economic benefit of your lost deduction is transferred to the person who bought the asset from you.
Between two American taxpayers, the Section 267 outcome is tolerable. The family keeps the relief, merely in different hands. Additionally, the buyer may be in a lower bracket, which sometimes makes the transfer neutral overall.
Why a UK Buyer Makes It Worthless
Now change the buyer to your UK limited company. That company is a foreign corporation, and it does not file an American return, so the restoration rule has no American taxpayer to benefit. Consequently, your disallowed loss simply evaporates from the family's US position entirely.
The same problem arises where the buyer is a non-US spouse or a British relative. Therefore, the usual professional comfort that the loss is merely deferred rather than lost is wrong in a cross-border setting. Our guide to Section 1244 and losses on UK company shares covers the related problem of losses on the shares themselves.
The Currency Layer on Top
Your American loss is computed in dollars while the British computation runs in sterling. Consequently, a genuine sterling loss can translate into a smaller dollar loss, or occasionally into a dollar gain, purely on exchange rate movement between purchase and sale.
That matters because Section 267 disallows losses and never touches gains. Accordingly, a transaction that produces a disallowed loss in Britain can produce a fully taxable gain in America on the same asset.
The Non-US Spouse Trap
Transfers between spouses are the most common way clients stumble into this, and the cross-border rules are unusually harsh.
Britain Sees Nothing, America Sees a Disposal
Britain treats transfers between spouses and civil partners living together as giving rise to neither gain nor loss, under section 58 of the Act. Consequently, moving an asset to your British spouse is invisible for UK capital gains purposes and is generally used to make efficient use of both annual exempt amounts.
America takes the opposite view where the spouse is not American. Section 1041 normally prevents gain or loss on transfers between spouses, but subsection (d) disapplies that rule entirely where the transferee spouse is a nonresident alien. Therefore, the transfer becomes a taxable disposal on your American return.
Heads You Lose, Tails You Lose
The consequence is asymmetric in the worst possible way. Where the asset stands at a gain, the transfer triggers American tax on a movement Britain ignores completely. Where it stands at a loss, Section 267 disallows the loss outright, because your spouse is family for these purposes.
Consequently, there is no version of this transfer that produces American relief. Our analysis of the section 6013(g) election explains how electing to treat a British spouse as a US resident changes the position, and our guide to married filing separately covers the wider filing consequences.
Timing the Election Before the Transfer
Where the election is already in place, the spouse is no longer a nonresident alien and the no gain or loss rule applies again. Nevertheless, the election carries permanent consequences of its own, including worldwide reporting for the non-American spouse.
Therefore, the sequencing matters more than the election itself. Accordingly, we model both the transfer and the election together rather than treating them as separate decisions.
What Still Works After Section 267
The rule is broad, yet it is not universal, and several ordinary steps remain effective.
Sell to the Market Instead
The cleanest answer is usually the simplest. Selling the asset on the open market to an unrelated buyer produces an allowable loss in both countries, with no clogging and no disallowance. Consequently, where the commercial objective is simply to realise a loss, the related-party route achieves the opposite of what was intended.
Watch the repurchase rules, though. The American wash sale rule and British share matching rules both attack a quick buy-back, and they run on different clocks, as our guide to wash sales and bed and breakfasting explains. Furthermore, the IRS guidance on capital gains and losses sets out how an allowable loss is actually used once Section 267 is out of the way.
Use the Relationships the Statute Omits
Because the Section 267 family definition stops at siblings, spouse, ancestors and descendants, a sale to a cousin, a nephew, or an in-law sits outside the American rule. Consequently, the American loss is allowable in full, even though the British loss may still be clogged.
That asymmetry is genuinely usable where the reader has UK gains to shelter elsewhere. Nevertheless, it requires care, because the constructive ownership rules can still pull an apparently distant person back into the net through a shared company.
Check Whether the Company Test Is Actually Met
The Section 267 company rule requires more than half the value of the stock. Consequently, a founder holding exactly 50 per cent, or holding 45 per cent alongside genuinely unrelated investors, falls outside the American test entirely. Our US tax return preparation service verifies the ownership position from the share register before any transfer is priced.
Additionally, the constructive ownership rules must be run before you rely on a percentage. Shares held by your spouse or your children count as yours, so an apparent minority stake is frequently a majority once attribution is applied.
Case Study: A London Founder and a £480,000 Loss
Consider an American who has lived in London since 2019 and owns the entire share capital of a UK investment company alongside a substantial personal portfolio. In 2021 our client acquired a holding in a listed technology group for £800,000 personally.
By early 2026 the holding was worth £320,000, and the plan was to sell it to the personal company at market value, realise a £480,000 loss, and set that loss against a £510,000 gain from an unrelated disposal earlier in the year. The company would then hold the position for the recovery.
Britain applied section 18 immediately. Because our client controls the company, the persons were connected, so the £480,000 loss became clogged and could be used only against future gains on other disposals to that same company. Consequently, it did nothing whatsoever against the £510,000 gain, which was taxed in full at 24 per cent, producing a UK charge of roughly £122,400.
America was worse. Section 267 applied squarely, because our client owned more than half the value of the company, so the entire loss was permanently disallowed rather than merely deferred. Meanwhile, sterling had strengthened between purchase and sale, so the dollar loss was smaller than the sterling loss in any event.
Finally, the restoration rule delivered nothing. The buyer was a UK company outside the American tax net, so the deduction transferred to a taxpayer that will never file a US return. Selling the same holding on the open market would have produced a fully allowable loss in both countries, sheltering the gain entirely and saving approximately £122,400 of UK tax.
How TaxYork Can Help
We prepare American and British returns for founders, investors, bankers, and company owners across London and the wider United Kingdom. Consequently, we see Section 267 problems constantly, and we price the transaction before it happens rather than reporting it afterwards.
Our work covers the ownership analysis, the constructive attribution run, the British connected-persons test, the clogged loss position, and the currency computation that decides the dollar result. Furthermore, where a transfer has already happened, we quantify exactly what survives and structure the remaining disposals to use it.
We also handle the catch-up filing that sometimes surfaces alongside these transactions. Where returns or foreign account reports fell behind, our FBAR and FATCA compliance service brings the position current first.
Conclusion
Section 267 is unforgiving, mechanical, and permanent, and it is far easier to trigger from London than from New York. Britain compounds the problem by deeming the transaction at market value and ring-fencing the loss, so the two systems arrive at the same practical answer by different routes.
Ultimately, the fix is almost always to avoid the related party altogether and sell into the market. Above all, run the ownership and attribution analysis before the transfer rather than after it, because Section 267 offers nothing at all to anyone who asks about it later.
Contact Us
If you are considering transferring an asset to your own company, to a family member, or to a British spouse, book a consultation with our cross-border team before you sign anything. Email hello@taxyork.com or call 020 3488 8606. Additionally, you can review our full range of US personal tax services online.
Disclaimer
This article provides general information about Section 267 and cross-border loss relief. It does not constitute tax advice and should not be relied upon for any specific transaction. Tax law changes frequently, and individual circumstances vary considerably. Accordingly, you should obtain professional advice tailored to your position before acting. TaxYork accepts no liability for any action taken in reliance on this article.