Section 83(b) for US Taxpayers in UK Companies: FMV, UMV and AMV

Why a US person in a UK company has two valuation problems

If you are a US citizen or green card holder working for, or founding, a UK private company, your shares sit inside two tax systems at once. The UK taxes employment-related securities under ITEPA 2003 and expects HMRC's market value concepts. The US taxes the same shares under the Internal Revenue Code and expects a fair market value figure supported by a reasonable valuation.

The two systems ask overlapping but not identical questions. A single well-constructed UK valuation can usually answer both, but only if it is built with that dual purpose in mind from the start. A report prepared purely for an EMI application will often lack the reasoning a US filing position needs, and a US-style memo will rarely use the UMV and AMV language HMRC expects.

This guide sets out what a Section 83(b) election is, how the US fair market value standard compares with UK unrestricted and actual market value, and what a UK valuation should contain if it is going to support both.

This is general information about valuation practice, not tax or legal advice. US tax positions should be confirmed with a qualified US tax adviser, and the UK position with your accountant.

What Section 83(b) actually does

Section 83 of the Internal Revenue Code taxes property transferred in connection with the performance of services. Where the property is subject to a substantial risk of forfeiture - typically unvested founder or employee shares with a reverse vesting or leaver buy-back at cost - the default rule is that no income arises on grant. Instead, income arises on each vesting date, measured on the value at that date, less anything paid.

A Section 83(b) election reverses the timing. The holder elects to be taxed now, at grant, on the excess of the fair market value of the shares over the amount paid for them.

The mechanics that matter in practice:

The reason founders file it is straightforward. Shares acquired at or near formation are usually worth very little. Electing at that point fixes a small (often zero) income amount, and every subsequent increase in value is capital rather than ordinary income. Without the election, a founder whose company grows sharply can face ordinary income on each tranche as it vests, at a value they cannot control and with no cash to pay the tax.

Where the UK valuation comes in

The election requires a fair market value figure. Where the company is a UK private company with no traded market, that figure has to come from somewhere defensible, and the natural source is the same valuation the company needs for UK purposes.

A UK employment-related securities valuation produces two numbers:

• Unrestricted Market Value (UMV) - the value of the share ignoring all restrictions in the articles or shareholders' agreement.
• Actual Market Value (AMV) - the value reflecting the restrictions that genuinely apply: leaver provisions, transfer restrictions, drag and tag, pre-emption.

Both are defined by reference to section 272 TCGA 1992 market value: the price the asset might reasonably be expected to fetch on a sale in the open market, with the hypothetical purchaser assumed to have all the information a prudent buyer would reasonably require.

The US fair market value standard in Treasury Regulation 1.83-3 is conceptually close: the price at which property would change hands between a willing buyer and a willing seller, neither under compulsion, both with reasonable knowledge of the relevant facts. The two standards are not identical in their statutory wording, but a properly reasoned UK valuation generally produces a figure that is supportable under both.

UMV, AMV and the US number: how they line up

The key difference is how each system treats restrictions.

The practical consequence: for a US person, the number that most closely matches the US standard is usually closer to UMV than to AMV, because ordinary vesting and leaver provisions are lapse restrictions the US disregards. A permanent restriction - a formula price that binds forever, not just during employment - is treated differently and can be reflected in the US figure.

This is why a valuation intended to serve both purposes should state UMV and AMV separately, and explain clearly which restrictions are temporary and which are permanent. A report that gives only a blended figure forces the US adviser to guess.

What a dual-purpose valuation should contain

If you are a US taxpayer holding shares in a UK company, the valuation report supporting your position should do all of the following:

1. State the valuation date precisely and tie it to the share transfer date, not to the board approval or the date the paperwork was signed.

2. Set out UMV and AMV separately, with the discount between them explained and quantified.

3. List every restriction in the articles and shareholders' agreement, and say whether each falls away on an event (vesting, exit, cessation of employment) or is permanent.

4. Show the methodology, whether that is an earnings multiple on normalised EBITDA, a discounted cash flow, an asset basis, or - for an early-stage company - a backsolve from the most recent funding round.

5. Address minority and marketability, since almost every employee or founder holding is a non-controlling stake in an illiquid company.

6. Record the information relied on and its date: statutory accounts, management accounts, cap table, funding documents, forecast.

7. Be dated and signed by the valuer, with the basis of appointment stated.

A one-page letter giving a number with no reasoning is the weakest possible support for a filing position in either country.

Worked example

A US citizen resident in the UK founds a UK company in March. She subscribes for 400,000 ordinary shares of £0.0001 at par, paying £40. The shares are subject to four-year reverse vesting with a buy-back at the lower of cost and market value if she leaves within that period.

In June the company raises £500,000 for 10% of the equity on a post-money valuation of £5m. The question is what the shares were worth in March.

UK analysis at the March date:

• The company had no revenue, no signed contracts and no funding commitment at that date.
• On an asset basis the equity is nominal.
• UMV: £40 (par value paid, no evidence of value above subscription price).
• AMV: £40, there being no meaningful value from which to discount.

US analysis at the same date:

• Fair market value at grant is the same nominal amount.
• Excess of FMV over amount paid: nil.
• A Section 83(b) election filed within 30 days of the March transfer fixes the income inclusion at nil and starts the capital gains holding period in March.

Without the election, the default rule applies. If the shares vest monthly over 48 months, each tranche is measured at its value on vesting. On the June round alone, the shares underlying the remaining unvested tranches are now being measured against a £5m post-money valuation, and ordinary income accrues on each vesting date thereafter - on paper gains, with no cash to fund the tax.

The cost of the election in this example was a 30-day deadline and a valuation. The cost of missing it can run into six figures.

The interaction with EMI and growth shares

Two UK structures cause particular complication for US persons.

EMI options. EMI is a UK statutory regime with no US equivalent. An EMI option granted to a US taxpayer is generally treated under US rules as a non-qualified option, which is taxed on exercise on the spread. Section 83(b) is not available on a standard option grant because an option is not, in itself, the transfer of property. Where the option is exercised early into restricted shares, an election may become relevant at that point. The UK EMI valuation agreed with HMRC has a 90-day validity window, which is a separate deadline from the 30-day US one, and the two should be planned together.

Growth shares. A growth share carries value only above a hurdle set at or above current market value, so its market value on issue is low - which is the point. For a US holder the same logic applies to the US fair market value, but the hurdle needs to be properly evidenced. An option-pricing or Black-Scholes style analysis supporting the hurdle is what makes the low grant-date value defensible in both jurisdictions. Where the growth shares vest, they are restricted property and an election at issue is typically the conversation to have.

Common mistakes

FAQ

Related guides

• UMV vs AMV explained - the two UK figures and why both are reported
• Section 431 election: the complete UK guide - the UK 14-day election that plays a comparable role
• EMI valuation guide - the UK scheme and its 90-day validity window
• Growth shares explained - hurdles, valuation and when they beat options
• What is HMRC SAV? - how HMRC reviews employment-related securities valuations