US and UK Tax Advisors GILTI Planning for UK Companies |

US and UK Tax Advisors: GILTI Planning for UK Companies

US and UK Tax Advisors on GILTI for UK Company Owners

US and UK tax advisors who work with Americans owning UK companies address the GILTI regime every year as part of the Form 5471 preparation, and the 2023 UK corporation tax rate increase to 25% has changed the GILTI landscape fundamentally for most UK trading companies. Before April 2023, the UK corporation tax rate was 19% — below the 18.9% GILTI high-tax exclusion threshold — meaning most UK company owners had a GILTI inclusion every year. Since the rate increase, the reverse is true for profitable trading companies: the 25% rate clears the threshold, the high-tax exclusion election eliminates the inclusion, and the GILTI compliance task becomes an annual confirmation exercise rather than an annual tax calculation. Furthermore, the change creates a planning awareness issue — US and UK tax advisors who advised clients before 2023 developed workflows assuming a GILTI inclusion, and those workflows must be actively updated to make the high-tax exclusion election in every subsequent year. Additionally, the effective tax rate calculation is not simply the headline 25% rate — it is the effective rate on the specific tested income of the company, calculated after deductions, credits, and reliefs — meaning some UK companies continue to have a GILTI inclusion even at the 25% headline rate. Consequently, the annual GILTI position requires a specific calculation for each UK company each year, not a blanket assumption that the 25% rate always eliminates the inclusion.

How the GILTI High-Tax Exclusion Works

The Threshold Calculation

The GILTI high-tax exclusion eliminates the US shareholder's GILTI inclusion where the effective foreign tax rate on the CFC's tested income exceeds 18.9%, which is 90% of the US corporate rate of 21%. Furthermore, the effective rate is calculated as the net income taxes paid or accrued on the tested income, divided by the tested income, expressed as a percentage. Additionally, the tested income for GILTI purposes is the CFC's gross income less allowable deductions — broadly the trading profit of the UK company for the year — with adjustments for Subpart F income and other categories excluded from the GILTI calculation. Consequently, a UK company with £200,000 of tested income that pays £50,000 of UK corporation tax on that income has an effective tax rate of 25% — well above the 18.9% threshold — and the high-tax exclusion election on Form 5471 eliminates the GILTI inclusion for that year. The IRS GILTI guidance is at https://www.irs.gov/businesses/corporations/gilti-high-tax-exclusion.

Why the Effective Rate May Differ From the Headline Rate

The UK corporation tax rates are 25% for companies with profits above £250,000, 19% for companies with profits below £50,000, and a marginal relief rate for profits between those thresholds. Furthermore, the effective rate on tested income may differ from the applicable corporation tax rate where the company has significant deductions — R&D tax credits, capital allowances, or loss reliefs — that reduce the actual corporation tax paid relative to the tested income. Additionally, where a UK company has significant interest deductions or other tax planning that reduces the effective UK rate below 18.9%, the high-tax exclusion does not apply even though the headline rate is 25%. Consequently, US and UK tax advisors calculate the effective tax rate on tested income specifically each year — dividing the actual UK corporation tax paid by the tested income — rather than assuming the headline rate equals the effective rate. The HMRC corporation tax guidance is at https://www.gov.uk/guidance/corporation-tax-rates.

Marginal Relief and the GILTI Threshold

Companies With Profits in the Marginal Relief Band

UK companies with profits between £50,000 and £250,000 pay corporation tax at the marginal relief rate, which produces an effective rate between 19% and 25% depending on the profit level. Furthermore, the marginal relief rate formula produces an effective tax rate of approximately 26.5% at the top of the band, declining to 19% at the bottom. Additionally, a company with profits of £100,000 in the marginal relief band pays an effective corporation tax rate of approximately 21.5% — above the 18.9% GILTI threshold, meaning the high-tax exclusion election is available. Consequently, most UK companies in the marginal relief band also qualify for the GILTI high-tax exclusion — but US and UK tax advisors must calculate the specific effective rate for each company at its specific profit level to confirm the threshold is met, since companies near the bottom of the marginal relief band may produce effective rates uncomfortably close to the 18.9% threshold.

Small Companies at the 19% Rate

UK companies with profits below £50,000 pay corporation tax at the 19% rate — below the 18.9% GILTI high-tax exclusion threshold. Furthermore, the difference between 19% and 18.9% is only 0.1 percentage points — so a company paying 19% on its tested income is above the threshold and the high-tax exclusion should be available. Additionally, the tested income effective rate calculation must confirm that the 19% rate applies to the full tested income and that no deductions or credits have reduced the effective rate below 18.9%. Consequently, US and UK tax advisors confirm the effective rate calculation for small UK companies at the 19% rate, since the margin between the company's effective rate and the 18.9% threshold is too narrow to assume safely. A company with £45,000 of profits paying 19% corporation tax has an effective rate of exactly 19% — available for the exclusion, but only marginally.

The Annual High-Tax Exclusion Election

How the Election Is Made

The GILTI high-tax exclusion election is made on Form 5471 — specifically on Schedule I-1 — for each CFC and each tax year. Furthermore, the election requires calculating the effective tax rate on tested income and confirming that it exceeds the 18.9% threshold before the exclusion is claimed. Additionally, the election was historically made at the CFC level — meaning a US shareholder who owns two UK companies must make the election separately on each company's Form 5471. Consequently, US and UK tax advisors prepare the Form 5471 for each UK company and make the high-tax exclusion election on each one independently — confirming the effective rate calculation is specific to each company's actual corporation tax payment and tested income. The IRS Form 5471 guidance is at https://www.irs.gov/forms-pubs/about-form-5471.

The Election Is Annual — Not Permanent

The GILTI high-tax exclusion election is made annually — it does not carry forward automatically from one year to the next. Furthermore, where a company qualifies for the exclusion in year one, the election must be remade in year two based on the year-two effective rate calculation — even if the company's circumstances appear identical. Additionally, a year in which the election is not made — even where the company would have qualified — results in a GILTI inclusion for that year, since the exclusion does not apply by default. Consequently, US and UK tax advisors treat the annual high-tax exclusion election as a mandatory annual step in the Form 5471 preparation — not as a one-time election that is made once and then assumed to apply going forward.

GILTI Planning: Ensuring the Threshold Is Always Met

Timing of Tax Payments and Effective Rate

The effective tax rate for GILTI purposes is based on net income taxes paid or accrued on the tested income in the CFC's tax year. Furthermore, where UK corporation tax is paid after the end of the company's accounting year — as is typical under UK instalment payment rules for smaller companies — the accrual-basis accounting means the tax is treated as paid in the year to which it relates. Additionally, the accrued tax figure from the company's UK corporation tax computation — not the actual cash payment date — is the basis for the GILTI effective rate calculation. Consequently, US and UK tax advisors use the corporation tax computation figure for the accounting year — the tax accrued on the tested income for that year — when calculating the effective rate, rather than the cash payment dates, which may fall in the following calendar year.

Impact of R&D Tax Credits on the Effective Rate

Where a UK company claims research and development tax credits — either as an enhanced deduction reducing taxable profits or as a payable credit reducing the corporation tax liability — the effective rate on tested income is reduced below the headline rate. Furthermore, a UK company with £200,000 of trading profit that claims an R&D payable credit of £30,000 pays net corporation tax of £20,000 — an effective rate of 10% on the tested income — well below the 18.9% GILTI threshold. Additionally, where R&D credits reduce the effective rate below 18.9%, the GILTI high-tax exclusion is not available, and a GILTI inclusion arises for the US shareholder. Consequently, US and UK tax advisors assess the R&D credit position for each UK company before confirming the GILTI high-tax exclusion election — since the credit significantly changes the effective rate calculation and may produce a GILTI inclusion that would not otherwise arise. The HMRC R&D guidance is at https://www.gov.uk/guidance/corporation-tax-research-and-development-rd-relief.

What Happens When the GILTI Inclusion Cannot Be Avoided

Calculating the Individual GILTI Inclusion Amount

Where the effective UK tax rate on tested income falls below 18.9% — and the high-tax exclusion is therefore not available — the US shareholder must calculate and include their GILTI amount in US gross income. Furthermore, the GILTI inclusion for an individual US shareholder is the shareholder's pro-rata share of the CFC's net tested income, minus a 10% deemed return on the CFC's tangible assets — the net deemed tangible income return. Additionally, for a UK service company with minimal tangible assets, the NTDIL is close to zero — meaning the GILTI inclusion is approximately equal to the entire net tested income of the company. Consequently, an individual US shareholder in a GILTI-inclusive year includes a significant amount of ordinary income — taxed at the full US marginal rate — even though the company's UK profits have already been subject to UK corporation tax. The IRS GILTI inclusion guidance is at https://www.irs.gov/businesses/corporations/gilti-high-tax-exclusion.

The Foreign Tax Credit for GILTI Inclusions

Where a GILTI inclusion arises and cannot be excluded, a foreign tax credit is available to partially offset the US income tax on the inclusion, but the credit is limited to 80% of the foreign taxes paid on the tested income. Furthermore, a UK company paying 19% corporation tax on tested income produces a GILTI foreign tax credit of 80% of 19%, which is 15.2% — offsetting much but not all of the US income tax on the same income. Additionally, the remaining US income tax after the GILTI credit — at the individual's marginal rate minus 15.2% of the tested income — represents genuine additional US tax that US and UK tax advisors model and communicate to the client before the year-end, so the liability can be planned for. Consequently, the GILTI foreign tax credit provides meaningful but incomplete relief for UK companies where the exclusion does not apply — making the exclusion planning the significantly preferred outcome.

Case Study: Two UK Companies, Different GILTI Outcomes

Our team advises a US citizen who owns two UK companies. Furthermore, Company A is a profitable management consulting firm with £180,000 of trading profits and no R&D credits — paying 25% UK corporation tax of £45,000. Company B is a technology startup with £60,000 of trading profits and a £15,000 R&D payable credit — paying net corporation tax of £600 (25% on £60,000 = £15,000, minus the £15,000 R&D credit, leaving minimal net tax, though the marginal relief calculation applies). Additionally, both companies have minimal tangible assets.

The US and UK tax advisors' GILTI analysis for each year produces the following. Company A: effective tax rate on tested income is 25% (£45,000 tax on £180,000 tested income) — well above 18.9%. The high-tax exclusion election is made on Form 5471, and the GILTI inclusion is zero. Furthermore, Company B: effective tax rate on tested income is approximately 1% (£600 net tax on £60,000 tested income after R&D credit) — well below 18.9%. The high-tax exclusion is not available. Additionally, the GILTI inclusion for Company B is approximately £60,000 — approximately $76,200 at the annual average rate — included in the US shareholder's income at the marginal US rate. The GILTI foreign tax credit for Company B is 80% of the actual UK tax paid — approximately $610 — leaving a significant net US GILTI liability. Consequently, the annual US and UK tax advisors advice for this client includes flagging the Company B R&D credit position each year and modelling the US GILTI tax cost — so the client can consider whether the R&D credit is worth claiming given the associated US GILTI tax cost.

Common GILTI Planning Mistakes

Assuming 25% Always Eliminates GILTI

The most common GILTI planning error is assuming the 25% UK headline rate automatically qualifies every UK company for the high-tax exclusion without performing the effective rate calculation. Furthermore, R&D credits, capital allowances, and loss reliefs can all reduce the effective rate below 18.9% even at the 25% headline rate. The correct approach requires US and UK tax advisors to calculate the effective rate on tested income for each company each year — dividing actual net corporation tax by tested income — before making the Form 5471 high-tax exclusion election. The HMRC corporation tax guidance is at https://www.gov.uk/guidance/corporation-tax-rates.

Not Making the Election on Form 5471

The high-tax exclusion does not apply automatically — it requires an annual election on Form 5471. Furthermore, where the election is not made in a year when the company qualifies, the GILTI inclusion arises unnecessarily for that year. The correct approach requires US and UK tax advisors to make the election explicitly on Schedule I-1 of Form 5471 for every qualifying year, not assuming it carries forward from prior elections or applies by default.

Not Modelling the R&D Credit Impact Before Filing

Many UK company owners claim R&D tax credits without considering the GILTI impact, discovering the US GILTI inclusion only when the Form 5471 is prepared. Furthermore, the decision to claim an R&D credit should be modelled against the US GILTI cost before the credit is claimed — since in some cases the US GILTI tax on the additional untaxed income may partially or fully offset the value of the UK R&D credit. The correct approach requires US and UK tax advisors to model the combined UK and US tax impact of R&D credit claims before year-end for any US-citizen company owner whose effective rate may fall below 18.9% as a result.

How US-UK Tax Can Help

At US-UK Tax, our team of Enrolled Agents, Chartered Tax Advisers, and Certified Public Accountants provides specialist US and UK tax advisors advice on GILTI planning for US citizens who own UK companies. Furthermore, we calculate the effective tax rate on tested income for each UK company each year, confirm whether the high-tax exclusion election is available, make the election on Form 5471 where the threshold is met, calculate the GILTI inclusion and foreign tax credit where the threshold is not met, and model the combined UK and US tax impact of R&D credits and other reliefs before year-end. Additionally, we advise on structure and profit timing to ensure the effective rate meets the threshold wherever commercially practical.

Contact our team today. Email hello@us-uktax.com call 0333-8807974, or visit https://www.us-uktax.com/contact/.

Conclusion

The GILTI high-tax exclusion has transformed the annual planning task for UK company owners since the 2023 corporation tax rate increase — from a calculation of the GILTI inclusion to a confirmation that the effective rate on tested income exceeds 18.9%. Furthermore, specialist US and UK tax advisors who calculate the effective rate annually, make the Form 5471 election where it applies, and model the R&D credit impact before year-end, ensure the client's GILTI position is correctly managed each year. Moreover, R&D tax credits that reduce the effective rate below 18.9% create a genuine planning tension between the UK benefit of the credit and the US cost of the resulting GILTI inclusion — a tension that requires specific US and UK tax advisors modelling before the credit is claimed. Contact US-UK Tax at hello@us-uktax.com or call 0333-8807974 today.

Contact Us

US-UK Tax | hello@us-uktax.com | 0333-8807974

https://www.us-uktax.com

FAQs

Q: Does the 25% UK corporation tax always eliminate GILTI?

A: Not automatically. The GILTI high-tax exclusion requires the effective tax rate on tested income to exceed 18.9%. Where R&D credits, capital allowances, or loss reliefs reduce the effective rate below 18.9% — even at the 25% headline rate — the exclusion is not available, and a GILTI inclusion arises.

Q: What is the GILTI effective rate calculation?

A: The net UK corporation tax paid or accrued on the tested income, divided by the tested income, expressed as a percentage. For a company paying £45,000 of corporation tax on £180,000 of tested income, the effective rate is 25%. This must be calculated annually — not assumed from the headline rate.

Q: How does an R&D tax credit affect the GILTI position?

A: An R&D payable credit reduces the net corporation tax paid, lowering the effective rate on tested income. Where the credit reduces the effective rate below 18.9%, the GILTI high-tax exclusion is not available — creating a GILTI inclusion at the shareholder's US marginal rate on the full tested income.

Q: Is the GILTI high-tax exclusion election automatic?

A: No. It must be made annually on Schedule I-1 of Form 5471 for each UK company in each qualifying year. Not making the election in a qualifying year results in an unnecessary GILTI inclusion. The election does not carry forward from prior years.

Q: What happens when the GILTI inclusion cannot be avoided?

A: The US shareholder includes the GILTI amount in US gross income at their marginal US rate. A foreign tax credit is available for 80% of the foreign taxes paid on the tested income, partially offsetting the US tax. For individual shareholders, no 50% GILTI deduction is available (that applies only to US corporations).

Q: Do companies in the marginal relief band qualify for the GILTI exclusion?

A: Usually yes. The marginal relief formula produces effective rates between 19% and 25% for profits between £50,000 and £250,000 — most of which exceed the 18.9% threshold. However, the effective rate must be calculated for each company at its specific profit level to confirm that the threshold is met.