In this episode of US-UK Tax Talk, Aidan Grant is joined by Michael Lewis, Partner in the US/UK Cross Border Tax Services team at EY, to discuss the tax issues that arise when US-connected employees in the UK receive shares, stock options, restricted stock units and other forms of deferred compensation.

Aidan and Michael explore why ordinary cash remuneration is generally easier to manage across the two countries, and what changes when an employee receives non-cash or deferred awards. They discuss PAYE, foreign tax credits, UK National Insurance, US Social Security and the importance of obtaining advice before an award is made or an election deadline begins to run.

The conversation also covers Section 431 and Section 83(b) elections, the particularly short deadlines that apply, and why the US and UK treatment of share plans does not always align. Michael explains the potential impact of Section 409A, including its 20% additional tax, as well as the rules under Section 280G when payments and share awards are connected with a change of control.

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Key Takeaways

Why is cash remuneration generally easier to manage across the US and UK

Cash salary and bonuses are usually recognised for tax purposes at a similar time in both countries. Where UK PAYE is deducted, a US taxpayer can often use the UK tax paid as a foreign tax credit against their US liability.

What warning signs should employees look out for?

Employees should seek advice if UK PAYE is not being deducted, if an employer introduces an unfamiliar share or deferred compensation plan, or if anyone mentions making a tax election. A US election may have a UK equivalent—and vice versa.

What are the main forms of share-based remuneration?

Common arrangements include restricted shares, restricted stock units and stock options. Restricted shares provide an ownership interest subject to conditions, while restricted stock units are generally a promise to deliver shares in the future. Stock options give an employee the right to purchase shares at a specified price.

Why do US and UK share plans create cross-border problems?

The two countries do not automatically recognise each other’s tax-advantaged share plans or elections. An arrangement that receives favourable treatment in one country may be taxed differently—or become subject to additional charges—in the other.

What are Section 431 and Section 83(b) elections?

A UK Section 431 election and a US Section 83(b) election can bring forward the income tax charge on certain restricted assets. This may allow future growth in value to be taxed as a capital gain rather than employment income, although the best approach depends on the circumstances and expected performance of the shares.

How quickly must these elections be made?

A UK Section 431 election generally needs to be completed within 14 days of acquiring the securities. A US Section 83(b) election generally has a 30-day deadline. Employees should obtain advice as soon as an award is proposed because the UK deadline may already be close by the time US documentation is provided.

Should employees always make both elections?

Not necessarily. Aligning the US and UK tax treatment is often helpful, but there may be circumstances in which making one election and not the other produces a better result. Any benefit must be modelled carefully against the risk of future share-price growth, insufficient foreign tax credits and state taxes.

What is Section 409A?

Section 409A is a US anti-deferral regime that can apply to arrangements such as cash deferrals, restricted stock units, discounted stock options and certain employee benefit trusts. Problems can arise where payment dates may be accelerated or postponed outside the permitted rules.

What happens if an arrangement breaches Section 409A?

A breach can result in accelerated US taxation and an additional 20% federal tax, along with possible interest and state-level consequences. Award documentation should therefore be reviewed from a US tax perspective before the arrangement takes effect.

Why does a change of control require special attention?

A takeover or other change of control may accelerate the vesting or payment of an award. The US definition of a qualifying change of control is narrow, so documentation that allows payment in broader circumstances can create a Section 409A problem.

What is Section 280G?

Section 280G concerns certain payments made to senior employees, officers and significant shareholders in connection with a change of control. Where the relevant payments reach the statutory threshold, the employee may face a 20% excise tax and the company may lose its corporate tax deduction.

Can a Section 280G issue be addressed before a transaction?

Depending on the company and circumstances, the payments may be reduced below the threshold or submitted to shareholders for approval. This planning needs to take place before the transaction and requires the affected employee to accept the possibility that shareholders may reject the payment.

How do UK National Insurance and US Social Security interact?

The US–UK Totalization Agreement helps determine which country’s social security system applies and can allow contribution records from both countries to be considered when establishing entitlement to benefits. Specialist advice may be needed, particularly where employment arrangements or contribution histories are complex.

When should employees seek advice?

Ideally, advice should be obtained before an award is granted, before its terms are finalised and well before any election deadline. It is usually much easier to adjust the structure or documentation in advance than to repair an adverse tax result after the event.