Do I owe US tax if I paid UK CGT on my management buy-out?

Often yes. UK Capital Gains Tax can be claimed as a foreign tax credit against the regular US federal tax on the gain, and on a UK-resident founder's exit it frequently eliminates it. However, the IRS states foreign tax credits cannot reduce the 3.8% Net Investment Income Tax reported on Form 8960. Most American vendors above the income thresholds therefore still owe NIIT, plus interest if the year was never filed.

Can I use the Streamlined Foreign Offshore Procedures for an unreported UK share sale?

Yes, if you meet the non-residency test and your failure to report was non-willful. You must have had no US abode and been physically outside the US for at least 330 full days in at least one of the last three years in the window. You file three years of returns, six years of FBARs and Form 14653, and pay tax and interest. Penalties are then waived.

Does Business Asset Disposal Relief reduce my US tax?

Not directly. BADR lowers the UK CGT rate on qualifying shares, currently 18% for disposals from 6 April 2026, 14% for 2025-26 and 10% before that, subject to a £1 million lifetime limit. A lower UK charge means a smaller foreign tax credit in the US. If UK tax falls below 10% of the gain, section 865 sourcing can also shift, so the credit calculation needs testing.

When does section 1248 apply to a UK company sale?

Section 1248 applies when a US person who owned 10% or more of the voting power sells shares in a company that was a controlled foreign corporation at some point in the previous five years. Part of the gain is then treated as a dividend, up to the untaxed earnings attributable to the shares. Under IRS Notice 2004-70 that dividend can still be qualified dividend income if the UK company is a qualified foreign corporation.

Do I need to file Form 5471 for the year I sold my shares?

Frequently yes. The Form 5471 instructions place a US person who disposes of enough stock to fall below the 10% ownership level in Category 3, with Schedule O Part II reporting the disposal. This applies even if the UK company was never a controlled foreign corporation. If you held 10% or more in earlier years without filing, those missing forms usually need to be included in the catch-up.

How are UK managers who bought NewCo shares taxed in the US?

A US citizen manager who acquires shares below market value in connection with employment is taxed under section 83 on the excess of value over price when the shares vest, unless a section 83(b) election is filed within 30 days of the transfer. The UK may tax the same undervalue under the employment-related securities rules, possibly in a different year, which complicates the foreign tax credit.

UK Management Buy-Out Gains and Streamlined Filing

If you are a US citizen living in the UK and you sold shares in a UK company through a management buy-out without reporting the gain to the IRS, the Streamlined Foreign Offshore Procedures are usually the cleanest way to put it right: you file the last three years of US returns, the last six years of FBARs and a signed non-willful certification, and the IRS waives the failure-to-file, failure-to-pay, accuracy-related, information return and FBAR penalties. You still pay any US tax and interest that is due. On an MBO, the tax that is due is rarely zero, because UK Capital Gains Tax does not cancel the 3.8% Net Investment Income Tax.

In the returns we prepare for American founders and managers in London and across the UK, a management buy-out is one of the most common single events that turns a quiet, low-tax US filing position into a six- or seven-figure gap. The UK side of the deal is handled carefully by corporate finance lawyers and UK accountants. The US side is often not handled at all, because nobody in the deal room asked whether one of the vendors holds a US passport. This guide explains how the sale lands on a US return, where the UK and US rules collide, and how to use the IRS streamlined route to catch up.

What is a management buy-out, and why does it matter for US tax?

A management buy-out (MBO) is a transaction in which the existing management team, usually backed by private equity or bank debt, buys a controlling interest in the company they run from its current owners. In the UK the typical structure is a newly incorporated holding company (NewCo) that acquires the shares of the trading company (OpCo). The vendors receive cash, and sometimes deferred consideration or shares in NewCo; the managers subscribe for NewCo shares, often alongside a private equity investor's preference shares or loan notes.

For a US citizen or green card holder, the key point is simple: the US taxes you on your worldwide income wherever you live. Selling UK shares is a US taxable event in exactly the same way as selling shares in a Delaware corporation. Your UK residence, your UK tax return and any Business Asset Disposal Relief claim change how much UK tax you pay, and they affect the foreign tax credit you can claim in the US, but they do not remove the need to report the sale on your Form 1040.

US persons meet an MBO from one of two sides:

The exiting vendor, often a founder or long-standing shareholder, who sells some or all of their OpCo shares to NewCo for cash and possibly rollover equity.
The incoming or continuing manager, who acquires NewCo shares, sometimes at a price below market value, and whose gain arrives later on a secondary sale or full exit.
In both cases, the US person may also have had signature authority over OpCo bank accounts and a personal UK account that received the proceeds, both of which can create FBAR obligations.

How is the UK side taxed: CGT and Business Asset Disposal Relief

In the UK, a vendor in an MBO normally pays Capital Gains Tax on the disposal of their shares. According to GOV.UK at https://www.gov.uk/capital-gains-tax/rates, the main CGT rates on shares are 18% on gains that fall within the basic rate band and 24% above it, and the annual exempt amount for 2026 to 2027 is £3,000.

Business Asset Disposal Relief (BADR) is a UK relief that reduces the CGT rate on a qualifying disposal of shares in a trading company. GOV.UK at https://www.gov.uk/business-asset-disposal-relief sets out the rate history, which matters a great deal for deals that straddle tax years:

10% on qualifying gains on disposals on or before 5 April 2025.
14% on qualifying gains on disposals between 6 April 2025 and 5 April 2026.
18% on qualifying gains on disposals from 6 April 2026.
A lifetime limit of £1 million of qualifying gains for disposals on or after 11 March 2020, as explained in HMRC's Capital Gains Manual at https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg63956.

For personal company shares, GOV.UK states that for at least two years before the sale you must hold at least 5% of both the shares and the voting rights, be entitled to at least 5% of profits and assets or disposal proceeds, be an employee or office holder of the company or a group company, and the company's main activities must be trading. Many exiting founders meet these tests. Many managers buying in at the MBO do not, at least not at the first exit, which is one reason why the UK tax outcome for the two groups can look very different.

Where a vendor takes shares in NewCo in exchange for OpCo shares rather than cash, UK law generally treats the exchange as not being a disposal. HMRC's manual at https://www.gov.uk/hmrc-internal-manuals/capital-gains-manual/cg52521 describes how, under section 135 of the Taxation of Chargeable Gains Act 1992, the new shares stand in the place of the old. We return to why the US answer can differ below.

How does an MBO share sale land on the US return?

On the US side, a vendor who has held OpCo shares for more than a year normally reports a long-term capital gain on Form 8949 and Schedule D (https://www.irs.gov/forms-pubs/about-form-8949). The gain is the US dollar value of the proceeds less the US dollar cost basis. Basis is translated at the exchange rate when the shares were acquired, and proceeds at the rate when the sale settled, so a founder who subscribed for shares when sterling was strong can report a dollar gain materially different from the sterling gain on their UK return.

IRS Tax Topic 409 at https://www.irs.gov/taxtopics/tc409 confirms that net long-term capital gain is taxed at 0%, 15% or 20% depending on taxable income, and on an exit of any size most of the gain sits in the 20% band. On top of that sits the Net Investment Income Tax.

The Net Investment Income Tax (NIIT) is a 3.8% federal tax on the lesser of net investment income or the amount by which modified adjusted gross income exceeds a threshold of $250,000 for married filing jointly, $125,000 for married filing separately and $200,000 for single filers, reported on Form 8960 (https://www.irs.gov/individuals/net-investment-income-tax). Capital gains on shares are investment income. The IRS states in its NIIT questions and answers at https://www.irs.gov/newsroom/questions-and-answers-on-the-net-investment-income-tax that foreign income tax credits are allowed only against the regular income tax and may not be used to reduce NIIT liability.

That single sentence is why so many UK-resident American founders owe US tax on an MBO even after paying substantial UK CGT. The foreign tax credit can absorb the regular federal tax on the gain, but the 3.8% sits outside its reach under the IRS position. On a £3 million exit, that is a five- or six-figure dollar liability that has been accruing interest since the original due date.

Is the MBO gain foreign source, and why does the 10% rule matter?

Source matters because the foreign tax credit limitation only allows UK tax to offset the US tax on foreign-source income. Under section 865(a) of the Internal Revenue Code, gain from selling personal property such as shares is sourced by the residence of the seller: a US resident's gain is US source and a nonresident's gain is foreign source. For this purpose, section 865(g)(1) treats a US citizen as a US resident unless they have a tax home outside the United States, so an American living and working in the UK will often be a nonresident for sourcing, and the gain will be foreign source (https://www.law.cornell.edu/uscode/text/26/865).

There is a catch that very few guides mention. Section 865(g)(2) says a US citizen is not treated as a nonresident for a sale unless an income tax equal to at least 10% of the gain is actually paid to a foreign country on that gain. For most MBO vendors paying UK CGT at 14%, 18% or 24%, the test is met. But in the returns we review, we test it line by line where BADR at 10% applied to the whole gain, where losses or reliefs reduced the UK charge, or where the US dollar gain is larger than the sterling gain because of currency movement. If the UK tax falls below 10% of the gain as measured for US purposes, the gain can revert to US source, and the credit can be lost unless treaty resourcing applies.

The US-UK income tax treaty contains provisions that can allow income the UK is entitled to tax under the treaty to be treated as foreign source for credit purposes, and section 865(h) provides a route for treaty-based resourcing. The Form 1116 instructions at https://www.irs.gov/instructions/i1116 require a separate foreign tax credit limitation, on a separate Form 1116, for income resourced under a treaty. Whether you rely on residence sourcing or treaty resourcing, the Form 1116 for an MBO year also needs the capital gain rate differential adjustments described in those instructions, because the gain is taxed at preferential US rates.

When does section 1248 turn part of the gain into a dividend?

Section 1248 is an anti-deferral rule that recharacterises part of the gain on selling shares in a controlled foreign corporation as a dividend. Under section 1248(a) (https://www.law.cornell.edu/uscode/text/26/1248), if a US person owned 10% or more of the voting power of a foreign corporation at any time during the five years before the sale while it was a controlled foreign corporation (CFC), the gain is included in income as a dividend to the extent of the company's earnings and profits attributable to those shares that accumulated while the person held them and the company was a CFC.

Most UK OpCos sold in an MBO are not CFCs, because a foreign company is only a CFC when US shareholders who each hold at least 10% together own more than 50% by vote or value. A single American founder holding 30% alongside British co-founders will usually fall outside section 1248 entirely. It becomes live where the company was founded by Americans, where a US founder and a US spouse or relative together held control, or where US family attribution rules push ownership over the line. In those cases, the company should also have been on Form 5471 every year, and there may have been annual GILTI or Subpart F inclusions.

The gap angle that competitor pages miss is how the dividend slice is taxed for an individual. IRS Notice 2004-70 (https://www.irs.gov/pub/irs-drop/n-04-70.pdf) states that amounts treated as dividends under section 1248(a) are qualified dividend income provided the CFC is otherwise a qualified foreign corporation and the other requirements of section 1(h)(11) are met. A UK company that is eligible for benefits under the US-UK treaty can be a qualified foreign corporation, so the dividend slice can still be taxed at the same maximum 20% rate as long-term capital gain, and it remains subject to NIIT. The practical differences are elsewhere:

The dividend portion is reported as dividend income, not on Form 8949, so it cannot be sheltered by capital losses carried forward from other years.
A dividend from a UK company is foreign source regardless of where the seller lives, so the section 865(g)(2) 10% test does not govern that slice.
Look-through rules for dividends from CFCs to 10% US shareholders can place the dividend in a different foreign tax credit category from a passive-category portfolio gain, which changes how UK CGT on the sale is allocated between Form 1116 baskets.
Earnings that were already taxed to you through Subpart F or GILTI inclusions are generally not taxed again, so accurate prior-year Form 5471 schedules directly reduce the section 1248 amount.
If treaty eligibility or holding period requirements fail, the dividend slice is taxed at ordinary rates, which is a real cost on a large exit.

What Form 5471 and FBAR obligations arise around an MBO?

Form 5471 (https://www.irs.gov/forms-pubs/about-form-5471) is the information return US persons file about interests in foreign corporations. The Form 5471 instructions at https://www.irs.gov/instructions/i5471 place a US person who disposes of sufficient stock to reduce their interest below the 10% ownership requirement in Category 3, with Schedule O Part II reporting the disposition. That makes the MBO year a filing year in its own right, often the final one, even for a founder whose shareholding never made the company a CFC. A founder who held 10% or more but never filed for earlier years usually has a run of missing forms, not just one.

Managers acquiring NewCo shares can equally cross the Category 3 threshold on acquisition if they reach 10%, which is more common in smaller buy-outs than people expect.

FBARs are the second compliance layer. According to the IRS FBAR page at https://www.irs.gov/businesses/small-businesses-self-employed/report-of-foreign-bank-and-financial-accounts-fbar, you must file FinCEN Form 114 if the aggregate value of your foreign financial accounts exceeded $10,000 at any time in the calendar year. It is due 15 April with an automatic extension to 15 October and is filed through FinCEN's BSA E-Filing System at https://bsaefiling.fincen.treas.gov/main.html. Signature authority over OpCo's business accounts as a director or finance lead counts, as does the personal account that received the sale proceeds, which on an MBO is usually far above the threshold.

How do the Streamlined Foreign Offshore Procedures fix an unreported MBO?

The Streamlined Foreign Offshore Procedures are the IRS programme for US taxpayers living outside the United States whose failure to report foreign income and assets was non-willful. The IRS explains the programme at https://www.irs.gov/individuals/international-taxpayers/us-taxpayers-residing-outside-the-united-states and the wider streamlined framework at https://www.irs.gov/individuals/international-taxpayers/streamlined-filing-compliance-procedures. The core elements are:

Non-residency: in at least one of the most recent three years for which the US return due date (or properly extended due date) has passed, you had no US abode and were physically outside the United States for at least 330 full days.
Returns: file delinquent or amended Forms 1040 for those three years, including all required information returns such as Form 5471, Form 8938 and Form 8960.
FBARs: file the six most recent years of delinquent FBARs electronically through BSA E-Filing.
Certification: sign Form 14653 (https://www.irs.gov/pub/irs-pdf/f14653.pdf), certifying eligibility and that the failures resulted from non-willful conduct, with a narrative explaining why.
Payment: pay the full tax and statutory interest due for the three return years.
Outcome: compliant filers are not subject to failure-to-file and failure-to-pay penalties, accuracy-related penalties, information return penalties or FBAR penalties.

Non-willful conduct is conduct that is due to negligence, inadvertence or mistake, or that results from a good faith misunderstanding of the requirements of the law. For an MBO vendor, the credible narrative is usually factual and specific: you were UK resident, you reported and paid UK CGT in full, your UK advisers never raised US reporting, and you did not know that a UK share sale needed a US return or that NIIT could not be credited. The narrative must match the facts in the file. A certification that glosses over a US adviser's written warning, or over deliberate choices about account reporting, is exactly the kind of weakness the IRS looks for.

The three-year window matters for timing. Because the window is fixed by due dates that have passed, a sale in a year that has already dropped out of the window is not reported on a streamlined return, while a sale inside it must be. We map the MBO completion date, any deferred consideration dates and the UK tax payment dates against the US window before starting any calculation.

Worked scenario: a US founder's MBO exit under the Streamlined Foreign Offshore Procedures

The following is an illustration only. All figures are hypothetical, rounded and simplified, and the exchange rate of $1.30 to £1 at sale and a US dollar cost basis of $75,000 are assumptions. It is not a calculation of any real taxpayer's liability.

Claire is a US citizen who has lived in London for fifteen years. She founded a UK software consultancy with two British partners, holding 30% of the shares, and she is a director. In June 2025 the management team, backed by a private equity fund, buys the company through a NewCo. Claire receives £3,000,000 in cash for shares that cost her £50,000. She has never filed US returns since moving to the UK. Because her British partners held the majority, the company was never a CFC, so section 1248 does not apply.

UK side: the sale falls in the 14% BADR period. Ignoring the annual exempt amount for simplicity, £1,000,000 of gain is taxed at 14% (£140,000) and the remaining £1,950,000 at 24% (£468,000), a total of £608,000 of UK CGT, roughly 20.6% of the sterling gain and $790,400 at the assumed rate.

US side: proceeds of $3,900,000 less a basis of $75,000 give a long-term capital gain of $3,825,000 on Form 8949 and Schedule D. At the 20% rate, the regular federal tax on the gain is broadly $765,000 before credits. Claire has a UK tax home, and the UK tax paid is well above 10% of the gain, so the gain is foreign source under section 865 and the UK CGT supports a foreign tax credit on Form 1116. In this illustration the credit eliminates the regular federal tax on the gain, with unused credit available to carry under the normal rules. Claire's other income takes her modified adjusted gross income well above the $200,000 single threshold, so NIIT applies to the whole gain: 3.8% of $3,825,000 is $145,350, with no foreign tax credit offset.

Compliance: 2025 sits inside Claire's three-year streamlined window. Her submission includes three years of Forms 1040 with Form 1116, Form 8960 and, because she held at least 10% and disposed of her shares, Form 5471 as a Category 3 filer for the sale year and any earlier years in the window in which she met a filing category, together with six years of FBARs covering her personal accounts and the company accounts she could sign on, and a Form 14653 narrative. She pays the NIIT plus interest. Had she not come forward, the same missing Form 5471 and FBARs would have carried their own penalty exposure independent of the tax.

Variation: if Claire's co-founders had been her American brother and a US college friend, each with at least 10%, the company would likely have been a CFC. Part of her gain, up to the untaxed earnings attributable to her shares while she held them, would then be a section 1248 dividend. Under Notice 2004-70 it could still be qualified dividend income taxed at up to 20%, but it would move from Form 8949 to dividend reporting, fall outside the section 865 sourcing test, and potentially sit in a different Form 1116 basket. The prior years would also have required full Form 5471 reporting and possible GILTI inclusions.

What about managers who bought in at the MBO?

Managers buying into NewCo face a different issue at the start rather than the end. If shares are acquired below market value because of employment, UK rules on employment-related securities can impose income tax on the undervalue, and HMRC's Employment Related Securities Manual at https://www.gov.uk/hmrc-internal-manuals/employment-related-securities sets out the framework. In the US, section 83 (https://www.law.cornell.edu/uscode/text/26/83) taxes the excess of fair market value over the amount paid when the shares vest, unless the manager makes a section 83(b) election within 30 days of the transfer to be taxed at acquisition instead.

Private equity MBOs commonly issue sweet equity subject to leaver provisions, which can amount to a substantial risk of forfeiture for US purposes. A manager who missed the 83(b) window may face US ordinary income as the shares vest, and the UK and US charges may arise in different years, which complicates the foreign tax credit. These amounts, where they fall in the streamlined window, belong on the catch-up returns as well.

Rollover equity, deferred consideration and timing traps

Vendors often roll part of their value into NewCo shares. UK share-for-share relief generally defers the UK gain on that part. The US may reach a similar deferral through its own reorganisation rules, but it is not automatic: an exchange of shares into a foreign NewCo can engage the section 367 outbound transfer rules, and 5% or larger US shareholders may need specific filings to preserve deferral. If those conditions were not met, the rolled portion can be a current US gain with no UK tax to credit against it, which is the worst mismatch in an MBO.

Earn-outs and loan notes create their own timing questions, and we mention them only in passing here. The point to hold on to is that a UK deferral mechanism does not tell you when the US gain is recognised, so each element of consideration needs its own US analysis.

Finally, tax years do not align. The UK tax year runs from 6 April to 5 April and CGT under Self Assessment is generally paid by 31 January after the tax year ends, while the US year is the calendar year. The UK CGT on a June 2025 sale is a 2025-26 UK liability paid in January 2027, but the gain is a 2025 US item. Matching the credit to the right US year, and choosing between paid and accrued methods for foreign taxes, is one of the calculation points we see most often done wrongly on self-prepared catch-up filings.

Common mistakes we see on MBO catch-up filings

Assuming UK CGT at 24% wipes out all US tax and ignoring the 3.8% NIIT on Form 8960.
Using sterling cost and proceeds converted at a single exchange rate rather than translating basis at the acquisition date rate.
Omitting the Category 3 Form 5471 for the year of sale because the company was not a CFC.
Leaving company bank accounts off the FBAR even though the vendor had signature authority as a director.
Failing to test whether the UK OpCo was a CFC when several shareholders were American or related.
Treating a NewCo share rollover as tax-free in the US because it was tax-free in the UK.
Writing a Form 14653 narrative that is generic rather than tied to the facts of the deal.

Next steps if you sold in an MBO and never filed

Start by gathering the share purchase agreement, completion statements, your UK Self Assessment returns and CGT computations, share acquisition records and bank statements for every UK account for the past six years. Establish whether you meet the 330-day non-residency test in at least one year of the window. Then have the US computation built in full, including Form 8960, Form 1116 and any Form 5471, before you sign anything. The Streamlined Foreign Offshore Procedures remain open for eligible, non-willful taxpayers, but the programme protects you only when the filings are complete and the certification is accurate, and only until the IRS contacts you first.