When US citizens or green card holders participate in stock option or equity compensation plans while working in the United Kingdom, understanding how to properly handle tax elections in both jurisdictions can make a meaningful difference in their tax outcomes. Two key elections, IRS Section 83(b) in the US and HMRC Section 431 in the UK, often come into play. In this article, we’ll explain the purpose of each election, how they interact, and key considerations for employees navigating cross-border tax implications.

What Is an IRS Section 83(b) Election?

Under US tax law, when an employee receives restricted stock (or other property) subject to a vesting schedule, the default rule is to recognize income as the shares vest. However, Section 83(b) of the Internal Revenue Code allows an employee to elect to be taxed on the fair market value of the stock at the time of grant, rather than at the time of vesting.

Benefits of an 83(b) election:

• Locks in the ordinary income tax at the time of grant, possibly at a lower valuation.
• Starts the clock for long-term capital gains treatment sooner.

Risks:

• If the shares never vest (e.g., you leave the company), there is no refund for taxes already paid.
• If the share value declines, you’ve still paid tax on the higher initial value.

The election must be filed with the IRS within 30 days of the grant date, and there are no extensions.

What Is an HMRC Section 431 Election?

In the UK, when employees acquire employment-related securities (such as restricted stock), they may face income tax based on the future growth in value of the shares. HMRC’s Section 431 election allows employees to elect to be taxed upfront on the full unrestricted market value (UMV) at acquisition. This mirrors the purpose of the 83(b) election in the US.

Benefits of a 431 election:

• Avoids future income tax on growth in share value between grant and vesting.
• Gains after acquisition are subject to capital gains tax, which may be at lower rates.

Key conditions:

• The election must be signed by both the employee and employer.
• It must be submitted within 14 days of share acquisition.

Cross-Border Considerations: Making Both Elections

For US persons living and working in the UK who are granted restricted shares, the combination of 83(b) and 431 elections may be crucial for tax alignment.

Scenario without elections:

• US: Taxed at vesting as ordinary income.
• UK: Taxed on growth at vesting as income.

Scenario with both elections:

• US: Taxed at grant on FMV via 83(b).
• UK: Taxed at acquisition on UMV via 431.
• Future gains are taxed as capital gains in both countries.

Making both elections can align timing and character of income, potentially avoiding double taxation or mismatches in tax treatment.

Practical Tips

• Coordinate with your employer: Especially for the 431 election, which requires employer cooperation.
• Track deadlines carefully: 30 days for 83(b); 14 days for 431.
• Document valuations: Ensure you have defensible FMV/UMV reports.
• Seek professional advice: Both elections are irrevocable and carry potential risks if misunderstood.

Final Thoughts

While each election on its own is a powerful tax planning tool, their true value shines for US expats in the UK when used in tandem. Properly executed, the 83(b) and 431 elections can significantly reduce exposure to income tax on future equity growth and align cross-border tax treatment.

The information in this blog post is for general informational purposes only and does not constitute professional tax advice. We strongly recommend consulting a qualified tax professional before making any decisions. US Expat Tax Advisor is not liable for any actions taken based on this content.

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