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Share remuneration for US national employees working in the UK  

The number of skilled US nationals working in the UK rose by 11% last year (according to research published on the Gov website): further evidence, if evidence is needed, of an increasingly globalised marketplace and the attractiveness of the UK as a location for global talent.  

If you are a UK business with US operations and/or engaging US nationals, or a US headquartered business with UK operations, how you best incentivise US nationals living and working in the UK, will be a key consideration for you. 

Our employee share schemes team discuss some of the relevant considerations and explain why it pays to plan ahead.  

Structuring incentive arrangements  

As with any incentive arrangement for your workforce, the primary question will be how to set the commercial terms of the incentive arrangement to align your workforce with the company’s and the shareholders’ goals.  

It will then be important to determine how to best structure the incentive to realise these goals, taking into account the legal and tax implications of the arrangement. 

Double taxation considerations 

When considering how to structure incentive arrangements for US nationals, a key issue will be the tax consequences of the arrangement. This is particularly an issue for US taxpayers as the US taxes its citizens (or greencard holders) on their worldwide income regardless of whether they are resident in the US.  This means that the US can tax income relating to non-US work. The UK taxes employment income based on residence and UK duties.  

Therefore, it is a common scenario that US taxpayers working in the UK may be subject to double taxation on their employment/wages income and the tax treaty between the UK and US provides tax relief in this scenario.   

Relevance of UK/US tax favoured share incentives 

As well as the complexity of navigating double taxation in the UK and US, the usual suite of UK tax-favoured share incentives for UK companies or US tax-favoured share incentives for US companies will need to be flexed for cross-border employees.  

There are approaches to navigate these issues which we can help you with and which might include consideration of the following structures, at a high level:

Restricted shares

Where the market value of the shares is low at the time of award, the company may make an outright award of restricted shares/restricted stock accompanied by entry into the relevant tax elections for UK tax (s.431 election) and for US tax (s.83b election) to enable the growth in value of the share from the time of award to be taxed at more favourable US and UK rates on (long-term) gains rather than as employment income. This does require a tax valuation which is supportable for both UK and US tax purposes and typically US tax valuations of employee equity can be higher than in the UK due to lower discounts for lack of control and marketability.  

Growth shares

The grant of a share award which benefits from future economic value creation only (a UK “growth share”) rather than present value. It may be possible to structure an award as a profits interest for US tax purposes and whilst this approach would still require a UK tax valuation for UK income tax purposes at the time of award, this may enable the economic benefits of the award to be taxed as a UK capital gain (US long term gain) in both jurisdictions with careful planning and structuring. 

Enterprise management incentives

The implementation of an enterprise management incentive option for UK purposes which also qualifies as an incentive stock option for US tax purposes, planning for and understanding the complexity of navigating two sets of qualifying criteria set by the US IRS and UK HMRC. 

These types of approaches can involve navigating a number of complex issues but for key executives who are driving value creation, they will be important considerations.  

Phantom awards/non-qualifying share options

Where tax efficiency is less important and simplicity is key, an instrument which is taxed as employment income in both jurisdictions for example a phantom award or a non-qualifying share option may be implemented and in this case the key tax issue for the individual will be alleviating double taxation through their personal tax return. Social security/national insurance contributions considerations will also be relevant in this scenario and whether and how the position can be optimised for these purposes. 

Maximising your cross-border opportunities 

Buying into the opportunities skilled US nationals can add to your workforce raises its own challenges, but it can also make all the difference to a successful cross border strategy.  

Our skilled team of employee share scheme solicitors can help you manage these challenges and make the most of emerging opportunities. Contact us on 0800 689 1700 or fill out the short enquiry form below and a member of our team will be in contact.

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