For Americans living in the UK, receiving stock options from a US company brings unique tax challenges. When those options are exercised early and restricted stock is received, two different tax systems may come into play: the US 83(b) election and the UK 431 election. Understanding how these elections work, and how they interact, is critical to avoiding double taxation and aligning treatment between the two countries.

Stock Options and Restricted Stock

When stock options are exercised early in the US, the employee may receive shares that are still subject to restrictions (such as forfeiture or vesting conditions). These shares are known as restricted stock. Both the US and UK have mechanisms to tax restricted stock, and both offer elections to accelerate taxation at grant.

The US 83(b) Election

Under US tax law, restricted stock is generally taxed as ordinary income when it vests. By filing an 83(b) election within 30 days of receiving the restricted stock, the taxpayer elects to pay income tax immediately on the fair market value at grant. Any future appreciation is then subject to capital gains tax when the shares are sold.

The main advantage is clear: if the shares are granted at a low value, the upfront tax cost is minimal and future growth is taxed more favourably. The risk, however, is that if the shares are later forfeited, the tax paid upfront cannot be recovered.

The UK 431 Election

The UK has a similar mechanism. Without a 431 election, HMRC may treat the employee as taxable on the increase in value of the shares as restrictions fall away. By signing a 431 election at the time of acquisition, the employee and employer agree that the shares are taxed upfront based on their unrestricted market value at grant. This ensures that any future growth is subject to capital gains tax rather than employment income tax.

Why Both Elections Matter for Expats

For US citizens living in the UK, making both elections is often essential. If only the 83(b) election is made, the US will tax the value at grant, but the UK may still tax a higher value at vesting, creating double taxation. Conversely, if only the 431 election is made, the UK will tax upfront, but the US may still tax again at vesting.

By making both elections, the timing of taxation is aligned across jurisdictions, and relief under the US–UK tax treaty or through foreign tax credits is more straightforward.

Example

Imagine an American living in London who exercises stock options early and receives restricted stock worth £1,000 at grant.

• If both elections are made: £1,000 is taxed immediately in both countries. Any future growth is taxed as capital gains.
• If only the 83(b) is made: The US taxes £1,000 at grant, but the UK may tax a higher amount at vesting.
• If only the 431 is made: The UK taxes £1,000 at grant, but the US may tax ordinary income later at vesting.

The mismatch can result in paying more tax overall and struggling to align credits between the two systems.

Final Thoughts

The 83(b) election and the 431 election serve similar purposes in their respective jurisdictions: they accelerate taxation at grant to secure capital gains treatment on future growth. For Americans living in the UK, making both elections is often the most effective way to prevent mismatches and reduce the risk of double taxation.

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.