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GILTI High-Tax Exclusion Election | US-UK Tax

GILTI High-Tax Exclusion Election: UK Guide

GILTI High-Tax Exclusion for UK-Resident US Citizens

The GILTI high-tax exclusion election is one of the most useful — and most frequently missed — planning tools available to US citizens who own or part-own a UK company. Furthermore, the introduction of GILTI (Global Intangible Low-Taxed Income) rules in 2018 created an immediate compliance burden for thousands of Americans running businesses abroad, many of whom had no idea they were caught by the legislation at all. Consequently, the high-tax exclusion election was designed specifically to prevent double taxation in situations where a foreign company already pays a corporate tax rate above 90% of the US rate. For UK companies subject to the 25% corporation tax rate, this election is often available — but it must be claimed correctly and at the right time.

In our experience, most UK-resident US business owners fall into one of two groups: those who have never heard of GILTI, and those who have heard of it but assume the UK's relatively high corporate tax rate automatically protects them. Unfortunately, neither assumption is safe. Additionally, the rules governing who must report GILTI, which entities are in scope, and how the high-tax exclusion is structured have evolved since their introduction and require careful review each tax year. Therefore, this guide sets out the key facts that UK-resident US citizens need to understand before filing their next US tax return.

What GILTI Is and Why It Affects UK Business Owners

The Basic GILTI Charge Explained

GILTI is a provision of the Tax Cuts and Jobs Act of 2017 that requires US shareholders of controlled foreign corporations (CFCs) to include a portion of the CFC's income in their own US taxable income each year, regardless of whether any dividend is paid. Specifically, a controlled foreign corporation is a foreign company in which US persons together own more than 50% of the voting power or value, with each US person holding at least 10%. For a US citizen in the UK who owns their own limited company, this almost certainly means their company is a CFC, and GILTI applies.

The GILTI inclusion is calculated by taking the CFC's net tested income and subtracting a deemed return of 10% on the company's qualified business asset investment (QBAI). Moreover, for many UK service-based businesses — consultancies, professional practices, IT contractors — tangible assets are minimal. Hence,o the QBAI deduction provides little relief, and the majority of the company's profit is pulled into the GILTI inclusion. As a result, US individual shareholders can find themselves paying US tax on income the UK company has already paid 25% UK corporation tax on, with only limited credit relief available.

Why the UK Rate Alone Does Not Always Protect You

Many UK business owners assume that because the UK corporation tax rate of 25% exceeds the US corporate tax rate of 21%, there is no GILTI exposure. However, this logic contains a critical flaw: the GILTI calculation is not simply a rate comparison. Furthermore, the US foreign tax credit rules, as they apply to individual shareholders — rather than to US corporations — are structured differently. Specifically, individual shareholders cannot apply the 50% GILTI deduction available to US corporations, so the effective tested income rate threshold for the high-tax exclusion is calculated on an individual basis, not a corporate one.

Additionally, the blended rate calculation used for the high-tax exclusion compares the effective rate on each CFC's tested income — not the headline UK rate — against 90% of the US corporate rate of 21%, which gives a threshold of 18.9%. A UK company with legitimate deductions, losses, or timing differences may report an effective rate on tested income that falls below this threshold in certain years, creating an unexpected GILTI liability. Accordingly, it is essential to model the effective tested income rate each year rather than relying on the headline UK corporation tax rate as a proxy.

How the High-Tax Exclusion Election Works

The Legal Basis and the 18.9% Threshold

The GILTI high-tax exclusion election is made under Treasury Regulation 1.951A-2(c)(7) and allows a US shareholder to exclude from GILTI any item of a CFC's income that has been subject to a foreign effective tax rate above 18.9%. Furthermore, the election is made on an item-by-item and CFC-by-CFC basis, which means it must be applied consistently and cannot be selectively applied to only some income items within the same CFC. Notably, since 2020, the election has been held annually, removing the previous five-year consistency requirement that made planning far more difficult.

For a UK-resident US citizen who owns a UK limited company paying the full 25% corporation tax rate on all its profits, the effective rate on tested income will typically exceed 18.9% in most years. Consequently, the high-tax exclusion should be available, and making the election correctly means the GILTI inclusion drops to zero — eliminating the need to calculate Form 8992, navigate the foreign tax credit limitation rules for GILTI, or pay any residual US tax on the UK company's profits beyond what the UK has already charged. However, the election must actually be made — it is not automatic.

Making the Election: Practical Steps

The GILTI high-tax exclusion election is made by attaching a statement to the US shareholder's federal return for the relevant tax year. Additionally, it must be made on a timely filed return, including extensions, so the deadline cannot simply be ignored. For most individual filers, this means the election must appear on the Form 1040 for the year in question, with the supporting GILTI calculations documented on Form 8992 or its supporting schedules. Furthermore, the election applies to all US shareholders of the same CFC, which creates coordination issues in jointly-owned companies where different US shareholders may have different preferences.

In practice, preparing the election correctly requires calculating the CFC's tested income under US tax principles, which can differ from the UK statutory accounts figures due to timing differences in depreciation, provisions, and accruals. Moreover, the effective rate calculation must use the foreign taxes paid on the tested income, not simply the headline UK rate applied to the accounting profit. Therefore, working with a specialist adviser who understands both UK accounting and US tax law is not optional when making this election — the IRS can challenge a calculation based on incorrect figures on examination.

GILTI and the UK Corporation Tax Rate Change

Impact of the 2023 Rate Rise to 25%

The UK's corporation tax rate increased from 19% to 25% for companies with profits above £250,000 from April 2023 onwards, with a small profits rate of 19% maintained for companies with profits below £50,000 and marginal relief applying between those thresholds. For GILTI planning purposes, this rate change is highly significant. Specifically, companies paying the full 25% rate should find that their effective tested income rate comfortably exceeds the 18.9% GILTI threshold, making the high-tax exclusion election available in most standard cases.

Nevertheless, companies subject to the 19% small profits rate — those with annual profits below £50,000 — face a different picture. At 19%, the effective UK rate is above 18.9%, but only marginally, and any adjustment between UK accounting profit and US tested income could push the effective rate below the threshold. Furthermore, companies in the marginal relief band between £50,000 and £250,000 face an even more variable calculation, since their effective rate varies with profit levels. Accordingly, the GILTI analysis must be performed year by year rather than assumed to produce the same result annually.

Associated Company Rules and Multiple Entities

Another complication arises where a UK-resident US citizen operates multiple companies, or where their UK company has associated companies under UK corporation tax law. Notably, the associated company rules affect which profits rate applies, which in turn affects the effective rate calculation for the high-tax exclusion election. Moreover, in group structures where profits are distributed among entities at different tax rates, the per-CFC and per-item nature of the GILTI election means that each entity must be analyzed separately.

Therefore, US citizens who have restructured their UK business interests into holding company arrangements, or who are shareholders in multiple UK companies simultaneously, should not assume that a clean result for one company extends to the others. Additionally, changes in group structure during the year — such as incorporating a new subsidiary or disposing of a shareholding — can affect the CFC status of various entities mid-year and require careful mid-year modelling rather than a purely year-end calculation.

Case Study: UK Consultant Making the Election

Background

Consider a US citizen living in Edinburgh who has operated a UK limited company providing IT consultancy services since 2019. The company has no employees and minimal tangible assets — a laptop and some office equipment — so QBAI is negligible. For the 2023 tax year, the company generated £180,000 in profit before UK corporation tax. Because the profit falls within the marginal relief band, the effective UK corporation tax rate is approximately 22.4%, comfortably above the 18.9% GILTI threshold. The owner had never made a GILTI high-tax exclusion election on his previous US returns.

The Correction and the Saving

After engaging our team, we identified that GILTI had applied to this client for every year since 2019, and that no foreign tax credits had been correctly claimed to offset the exposure. Furthermore, a three-year amendment program was required to correct the prior returns. For the current year, making the high-tax exclusion election correctly eliminated the GILTI inclusion entirely, saving the client approximately $28,000 in US federal tax compared with the uncorrected position. Additionally, we confirmed that the election was available retrospectively for the open statute years, allowing amended returns to recover prior overpayments. Consequently, the total recovery across amended years exceeded $60,000.

Common Mistakes UK Business Owners Make

Ignoring GILTI Altogether

The most common mistake is simply not reporting GILTI at all. Furthermore, many US citizens in the UK prepare their own returns or use generalist US tax preparers who are unfamiliar with CFC rules, and GILTI simply does not appear on the return. Additionally, the IRS has increased its scrutiny of international filers in recent years, and the failure to report a GILTI inclusion when one exists — combined with the failure to file Form 5471 for the CFC — can result in substantial penalties, including the $10,000 per year automatic penalty for a late or missing Form 5471.

Calculating Tested Income Using Accounting Figures

Another frequent error is calculating tested income using the UK statutory accounts profit figure rather than recomputing it under US tax principles. Notably, differences in depreciation treatment, the timing of income recognition, and the treatment of certain provisions can all cause the US tested income figure to diverge from the UK accounting profit. As a result, an effective rate calculation based on the UK accounts figure may be incorrect — either understating or overstating the rate — and the decision of whether to make the election may itself be based on the wrong analysis.

Get in Touch

At US-UK Tax, our specialist team works exclusively on cross-border US and UK tax matters for American citizens living and working in the United Kingdom. Furthermore, we handle GILTI analysis, CFC reporting, Form 5471 preparation, and the GILTI high-tax exclusion election as part of a comprehensive US tax return service designed specifically for UK-resident business owners. Our advisers understand both the UK statutory accounts framework and the US federal tax rules that apply to the same income, which means our calculations are built on solid foundations rather than simplified approximations.

To discuss your UK company's GILTI position and whether the high-tax exclusion election applies to your situation, contact us today. Reach our team by email at hello@us-uktax.com, by phone on 0333-8807974, or visit https://www.us-uktax.com/contact/ to book a consultation.

Conclusion

The GILTI high-tax exclusion election is not a planning luxury — it is a necessary annual step for most UK-resident US citizens who own a UK company. Furthermore, the consequences of ignoring it range from unnecessary double taxation in the best case to substantial IRS penalties in the worst. Moreover, the election must be calculated correctly, documented properly, and filed on time, which means the quality of the adviser handling the return matters enormously. Consequently, UK business owners should not leave this decision to generalist preparers who lack deep experience with CFCs and GILTI.

With UK corporation tax rates now at 25% for most profitable companies, the high-tax exclusion should be achievable for the majority of UK CFC owners. However, the analysis must be conducted annually, and changes in profit levels, group structure, or UK tax rates can alter the outcome. Therefore, working with a specialist cross-border tax team — one that understands both sides of the Atlantic — is the most reliable way to ensure that the GILTI high-tax exclusion election is properly claimed every time it is due.

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FAQs

Q: Who does the GILTI charge apply to?

GILTI applies to US citizens and residents who own 10% or more of a controlled foreign corporation. Furthermore, most UK limited companies owned by a US citizen will qualify as a CFC.

Q: What is the high-tax exclusion threshold for GILTI?

The threshold is 18.9%, which is 90% of the US corporate rate of 21%. Additionally, the effective rate is measured on tested income, not on the headline UK corporation tax rate.

Q: Does the 25% UK corporation tax rate guarantee exclusion?

In most cases, yes, but not automatically. Furthermore, differences between UK accounting profit and US tested income can cause the effective rate to fall below 18.9% in some years.

Q: Do I need to file Form 5471 for my UK company?

Yes. US citizens who own 10% or more of a UK company must file Form 5471 annually. Additionally, failure to file carries an automatic $10,000 penalty per year per CFC regardless of tax owed.

Q: Can I make the GILTI election on an amended return?

Yes, for years still within the statute of limitations. Furthermore, if prior returns omitted the election and GILTI was overpaid, amended returns can recover those overpayments.

Q: What form is used to report GILTI?

GILTI is calculated on Form 8992, and the inclusion flows to Schedule 1 of Form 1040. Additionally, the high-tax exclusion election is documented via an attached statement to the return.