Equity Without Borders? The US–UK Tax Traps in RSUs, Restricted Shares, Growth Shares and Stock Options

Imagine a US executive relocating to London with a sizeable RSU award, a start-up founder holding restricted shares who moves to the UK, or a UK company hiring a senior employee from Silicon Valley and offering stock options as part of the package. For years, the equity is little more than a number on a statement. Then an IPO, trade sale or private equity exit turns paper value into real wealth almost overnight, and that is often the moment an unexpected tax bill comes to light, sometimes in two countries at once.

In a global labour market where employees, founders and executives routinely cross borders, equity compensation has become one of the most complex (and high-risk) elements of remuneration. Restricted stock units (RSUs), restricted shares, growth shares and stock options can all create significant value, but their tax treatment — particularly across the US and UK — differs materially in timing, character and cost. The stakes are highest at exit. Decisions taken years earlier, at grant, on relocation or in the days after shares are issued, can decide how much of the proceeds an employee actually keeps. Lock-up periods add a further twist, as tax can fall due before the shares can be sold.

This article explains the key differences between these forms of award, how each is taxed in the US and the UK, and why internationally mobile employees need to plan well before a liquidity event is on the horizon.

1. RSUs, Restricted Shares, Growth Shares and Stock Options: The Basics

At a high level, all of these awards are designed to align employee incentives with company performance. However, they work very differently.

Restricted Stock Units (RSUs)

RSUs are a contractual promise to deliver shares (or a cash equivalent) once certain conditions are met — typically continued employment over a vesting period or the achievement of performance targets. Until vesting (and often until settlement), the employee has no ownership rights, including voting or dividend rights.

Restricted Shares

Restricted shares (often called restricted stock awards, or RSAs, in the US) are actual shares issued to the employee at the outset. They are subject to restrictions, most commonly forfeiture if the employee leaves before a vesting date, along with limits on transfer. The employee may receive them free or pay a subscription price.

Unlike RSU holders, the employee is the legal owner from day one. They usually have voting and dividend rights even while the shares are unvested. Restricted shares are particularly common for founders and early employees of start-ups, where the share value at issue is low.

Growth Shares

Growth shares are a separate class of share carrying rights only to value above a set hurdle, usually a figure at or slightly above the company's value when the shares are issued. Because the holder participates only in future growth, the shares have a low value at the outset, so the employee can acquire them cheaply with little or no upfront tax charge.

Stock Options

Stock options grant the right — but not the obligation — to purchase shares at a fixed “exercise” or “strike” price in the future, once vesting conditions are satisfied.

Why the distinction matters

• Ownership: Restricted shares and growth shares are owned from grant. RSUs and options only become shares on vesting or exercise.
• Risk profile: RSUs and restricted shares usually retain some value at vesting, whereas options can expire worthless if the share price does not exceed the strike price. Growth shares sit between the two: they have value only if the company grows beyond the hurdle.
• Timing of tax: RSUs are generally taxed at vesting. Restricted shares are taxed when the restrictions lift, which is usually the same moment as vesting but not always, since restrictions such as transfer limits can outlast the forfeiture condition. An election can instead bring the charge forward to the award date. Options are typically taxed at exercise.
• Cash flow risk: Restricted shares and options can trigger tax without liquidity, particularly in private companies.
• Elections: Restricted shares and growth shares allow elections to pay tax upfront (Section 83(b) in the US, Section 431 in the UK). These are not available for RSUs or conventional options.

These differences drive not only economic outcomes, but also tax exposure.

2. Federal tax Treatment in the United States

RSUs in the US

RSUs generally do not create a taxable event at grant. Instead, taxation arises when the units vest and shares (or cash) are delivered.
At vesting:

• The fair market value (FMV) of the shares is treated as ordinary wage income.
• Federal income tax and payroll taxes apply.
• Any future appreciation is taxed when the shares are sold.

If the shares are held for more than 12 months after vesting, subsequent gains may qualify for long-term capital gains rates, though the Net Investment Income Tax (NIIT) may also apply.

Restricted Shares in the US

Restricted shares are governed by Section 83 of the Internal Revenue Code. Because the shares are subject to a substantial risk of forfeiture, there is generally no tax at grant by default.

At vesting (absent an election):

• The FMV of the shares at vesting, less any amount paid, is treated as ordinary wage income subject to federal income tax and payroll taxes.
• The capital gains holding period begins at vesting.
• Dividends paid on unvested shares are treated as additional compensation rather than dividend income.

If a Section 83(b) election is made (see Section 5), income is measured at grant instead. The holding period starts at grant, later growth is capital in nature, and dividends are taxed as dividends.

Restricted stock can also arise from stock options (covered below). Where a plan allows “early exercise” of unvested options, the shares acquired are restricted stock, and an 83(b) election becomes available.

There is no separate US category for growth shares. For US purposes they are simply shares acquired in connection with the performance of services, taxed under the same rules; income equal to FMV less the amount paid, with an 83(b) election available where the shares are subject to a risk of forfeiture. Everything therefore turns on the value placed on the shares when they are issued, which the US may measure very differently from the UK (see Section 4).

Stock Options in the US

Tax treatment depends on the type of option.

Non-Qualified Stock Options (NSOs)

• Taxed at exercise on the spread between FMV and strike price as ordinary income.
• Subsequent gains or losses on sale are capital in nature.

Incentive Stock Options (ISOs)

• No regular income tax at grant or exercise if statutory holding requirements are met.
• Exercise may still trigger Alternative Minimum Tax (AMT).
• If the shares are held for at least two years from grant and one year from exercise, the entire gain may be taxed as long-term capital gain on sale.

For employees, the difference between ISO and NSO treatment can materially affect after-tax outcomes.

State taxes

State tax treatment should also be considered separately, as each US state has its own rules regarding the taxation of equity compensation. The timing, sourcing and character of income can differ from federal treatment, particularly where an individual has worked in multiple states or changes state residency during the earnings period.

3. Tax Treatment in the United Kingdom

RSUs in the UK

The UK approach broadly mirrors the US.

At vesting (or when shares become available):

• The FMV of the shares is treated as employment income subject to Income Tax.
• Employee and employer National Insurance Contributions (NICs) also apply where the shares are “readily convertible assets” (see below), which typically includes listed shares.
• Any increase in value after vesting is subject to Capital Gains Tax (CGT) when the shares are sold.

Restricted Shares in the UK

In the UK, the tax treatment of restricted shares depends on the nature of the restrictions. As a general position:

• Where the shares are subject to forfeiture that will lift within five years, there is typically no Income Tax when the shares are acquired. Instead, tax arises when the restrictions lift.
• Where other restrictions apply, such as limits on transfer, Income Tax can arise at acquisition on the value of the shares (taking the restrictions into account), less any amount paid.

Without an election, part of the growth in value while the shares are restricted can be taxed as employment income rather than as a capital gain. Once restrictions have lifted, further growth is subject to CGT on sale. Dividends are taxed as dividend income, since the employee owns the shares.

Because of this, many UK companies require employees to sign a Section 431 election as a condition of receiving restricted shares (see Section 5).

Growth Shares in the UK

Growth shares are increasingly used by UK companies. The employee subscribes for a new class of share carrying rights only to value above the hurdle. Because the shares have limited value at that point, the employee can usually pay full market value for them at modest cost, so little or no employment income charge arises on acquisition.

Provided the shares are acquired at market value and the appropriate Section 431 election is signed, growth above the hurdle is generally taxed as a capital gain on sale rather than as employment income. That is the attraction, particularly for key employees in private companies.

Stock Options in the UK

Unless the options are granted under a tax-advantaged scheme:

• Exercise triggers Income Tax on the spread between FMV and strike price, together with NICs where the shares are readily convertible assets.
• Further appreciation is subject to CGT on sale.

The UK offers tax-advantaged equity plans — most notably Enterprise Management Incentives (EMIs) and Company Share Option Plans (CSOPs) — which can significantly reduce tax costs when available.

Readily convertible assets and NICs

Across all of these awards, whether NICs arise depends on whether the shares are “readily convertible assets” (RCAs). Broadly, these are shares for which trading arrangements exist or are likely to exist, which typically includes listed shares. Where shares are RCAs, the employer must operate PAYE and NICs apply. Many private company shares fall outside this definition. In that case, Income Tax is paid by the employee through self assessment and no NICs arise. It would be wrong, though, to assume that private company shares are always outside the net. The test looks forward as well as back, so shares can become RCAs where a sale process, an IPO or another trading arrangement is in prospect or is likely to come into existence. That is precisely the point at which awards tend to vest and options tend to be exercised, so the PAYE and NICs position can change in the run-up to a transaction. Shares in subsidiaries, ie companies under the control of another corporate, are always considered RCAs.

4. US–UK Interaction: Where Complexity Peaks

This is where many internationally mobile employees encounter problems.

For US citizens working in the UK, equity income is generally taxed based on where the services were performed during the vesting period. This means:

• The UK may tax a portion of RSU, share or option income even if the award was granted while the employee lived in the US.
• The US will still tax the income under its domestic rules, which could be at a different point in time.

Without planning, this can result in double taxation or cash flow mismatches.

Time apportionment, and why social security does not follow it

For employees who work across both the UK and the US during the life of an award, an apportionment of the income between the two jurisdictions may be required. The precise methodology depends on the type of award and the relevant facts, but the analysis can become more complex where awards vest in multiple tranches, as each vesting event may need to be considered separately.

A key part of this exercise is maintaining an accurate workday calendar, showing where duties were performed throughout the relevant period. In practice, this is often one of the most important pieces of evidence in supporting the allocation of income between jurisdictions and can have a significant impact on the resulting tax position.

Social security is generally analysed independently from income tax, meaning the payroll withholding result may differ from the income tax treatment in certain cases. Under the US-UK social security agreement, an individual is generally subject to the social security system of one country at a time, which can produce a different result from the income tax analysis.

Treaty relief

The US–UK tax treaty helps mitigate these issues by allowing:

• Allocation of equity income between jurisdictions
• Foreign tax credits to offset double taxation

However, treaty relief does not eliminate reporting obligations, and correct application often requires detailed tracking of workdays during vesting and careful coordination of filing positions.

Tax-advantaged plans may not work in both countries

A plan that is tax-advantaged in one jurisdiction will not necessarily be recognised in the other, which can create unexpected tax consequences. For example:

• EMI and CSOP options have no special status in the US. For a US taxpayer, they are generally treated as NSOs, so the spread is taxed as ordinary income at exercise even where no UK Income Tax arises.
• ISOs have no special status in the UK. An employee who is UK resident, or who performed UK duties during the vesting period, may face UK Income Tax (and NICs where the shares are readily convertible assets) on the spread at exercise, even where no regular US income tax arises.
• Features permitted in one country's plan can cause problems in the other. EMI options, for instance, can be granted with an exercise price below market value. For a US taxpayer, a discounted option may fall within Section 409A, which can bring an additional 20% tax plus interest.

Where relief is available in one country but not the other, there may be little or no tax in the first country to credit, so the employee can bear the full cost. For cross-border employees, thought will need to be given to the appropriate equity compensation plan to avoid these issues.

EMI options exercised while the employee is in the US

EMI deserves particular mention, because the mismatch runs deeper than a simple loss of relief. Where a qualifying EMI option is exercised, the UK may impose no Income Tax at all, with the whole gain taxed as a capital gain when the shares are eventually sold. For US purposes the same option is treated as a non-qualified option, so the spread at exercise is ordinary income at that point.

The result is a mismatch of both character and timing with US ordinary income at exercise, UK capital gain on a later sale if UK tax resident. Foreign tax credits are given by reference to the type of income and the year in which it arises, so UK CGT on the disposal can be very difficult to set against US tax paid on the earlier exercise, and vice versa. The problem is at its sharpest where exercise and sale fall in different tax years. This is an area where specialist US–UK advice is a necessity.

Restricted shares: election mismatches

Restricted shares are especially prone to timing mismatches. Consider a US citizen who makes an 83(b) election but no Section 431 election. The US taxes them at grant, while the UK taxes them later, when restrictions lift, on a different value. When income is taxed in different years and on different bases, it can be hard to get full foreign tax credit relief. The employee may end up paying tax twice on part of the same growth.

Where both elections are made, both countries broadly tax the unrestricted value at acquisition, and later growth is capital in both. Even then, the US and UK values placed on the shares can differ (see below).

Valuations

Valuation is a common issue. The US and UK apply different valuation principles, so the same shares can be valued differently in each country, which can make full foreign tax credit relief harder to obtain.

Crucially, a valuation agreed with one tax authority is not binding on the other. HMRC will agree values for EMI and other employment-related securities purposes, and UK practice will often support substantial discounts for minority holdings and for restrictions. A US valuation of the same company, prepared for Section 409A purposes and on different assumptions, can produce a materially higher figure for the same shares. Neither authority is obliged to accept the other's number, and neither is bound by a valuation prepared for a different purpose.

The practical consequence is that a low agreed UK value offers no protection against a higher US measure of income, and vice versa. Where an employee is, or may become, taxable in both countries, any valuation should be sense-checked against the other jurisdiction's likely approach before it is applied across borders rather than simply adopted.

5. Section 83(b) (US) and Section 431 (UK) Elections

Certain elections can significantly alter the timing and character of tax.

US: Section 83(b)

An 83(b) election allows employees receiving restricted stock to be taxed at grant rather than at vesting. This can be advantageous where:

• The initial value is low
• Significant growth is expected

The risk is that tax paid upfront is generally not recoverable if the shares never vest or decline in value.

Key practical points:

The election must be filed with the IRS within 30 days of the shares being transferred. The deadline is strict, and late elections are generally not accepted.

• It applies to restricted stock, including early-exercised options. It does not apply to RSUs or ordinary options.
• If the shares are later forfeited, no deduction is available for the income previously taxed. Any loss is generally limited to the amount actually paid for the shares.

UK: Section 431

A Section 431 election applies to restricted or growth shares in the UK. By electing upfront taxation on the unrestricted market value, future growth is taxed as capital rather than employment income.

Key practical points:

• A Section 431 election is a joint election between employer and employee and must be made within 14 days of acquisition. It is not filed with HMRC; the employer keeps it on record.
• Strictly, where the employee pays full unrestricted market value for the shares, there should be no further Income Tax when the restrictions lift and an election is not needed. In practice, most advisers recommend signing one anyway, as a belt and braces measure. If the valuation is later challenged and the unrestricted market value is found to have been higher than the amount paid, a proportion of the future growth would otherwise be taxed as employment income. The election reduces that risk.

Coordinating the elections

The elections are not interchangeable. An 83(b) election has no effect for UK purposes, and a Section 431 election has no effect for US purposes. An individual within the scope of tax in both countries may therefore need to sign both, to two different deadlines; 30 days in the US and 14 days in the UK. Missing one does not invalidate the other, but it does reintroduce the mismatch the elections were meant to remove.

Where an employee is not within the UK tax net at the time of acquisition but may become so later, whether a Section 431 election can or should be made is a question to take advice on at the time. In practice, signing one where the employer is willing to do so is often the prudent course.

For internationally mobile employees — particularly US citizens working in the UK — making coordinated elections where appropriate can:

• Reduce timing mismatches
• Align US and UK tax treatment
• Limit exposure to double taxation

6. Key Takeaways

Equity compensation can be one of the most valuable — and most misunderstood — components of a remuneration package.

• RSUs, restricted shares, growth shares and stock options differ fundamentally in ownership, risk, reward and tax timing.
• The US and UK tax systems are broadly similar in concept, but differ in execution and timing.
• For cross-border employees, vesting periods, mobility and elections often matter more than grant dates.
• A valuation agreed in one country does not bind the other. Any value used across borders should be sense-checked against the other jurisdiction's approach.
• Restricted shares offer the most scope for planning through elections, but the deadlines are short: 30 days in the US and 14 days in the UK. For cross-border employees, the two elections should be considered together, and both may need to be signed.
• Mismatches such as EMI options exercised by a US taxpayer can leave tax in one country with no relief in the other. Specialist advice is essential before exercise or sale.
• Poor planning can result in unnecessary tax, liquidity issues and compliance risk.