Starting a business in the UK can be an exciting step. However, if you're a US citizen or green card holder, choosing the right business structure from the outset is essential. The UK and US tax systems do not always align, and the wrong decision can lead to unexpected tax liabilities, additional reporting requirements, and higher compliance costs.

There is no one-size-fits-all solution. The right structure depends on factors such as:

• how profitable you expect the business to be

• whether you intend to reinvest profits or take income from the business

• your longer-term growth plans

• your eventual exit strategy.

If you already own a UK company, it's also worth reviewing your structure as your business grows or tax rules change. With the right planning from the outset, you can often reduce both your overall tax burden and the ongoing complexity of US compliance.

The case study below illustrates how we supported a client with some of the key US tax considerations when owning a UK limited company, including:

• whether the US Controlled Foreign Corporation (CFC) rules applied

• how the company's profits would be taxed in the US (Net CFC Tested Income (NCTI), formerly GILTI)

• whether a Form 8832 "check-the-box" election was appropriate

• the elections available to help reduce double taxation, including the High-Tax Exclusion and Section 962 election

Case Study

Christine is a US citizen who is resident in the UK and is the sole director and shareholder of a small business. Christine set up her business as a UK limited company, which prepares financial accounts and files a Form CT600, paying UK Corporation Tax.

Shortly after setting up her UK limited company, Christine heard that US citizens can face complications when owning foreign companies and came to Buzzacott for specialist advice.

For UK tax purposes, Christine is generally taxed on the salary and/or dividends she takes from the company.

In the US, a UK limited company, in the absence of any elections, is treated as a corporation. As Christine controls the company, it is a Controlled Foreign Corporation (CFC) for US tax purposes. This status can trigger additional US reporting obligations and may result in US personal tax charges on certain categories of income including, in many cases, a US tax inclusion on the company’s profits even if they are retained within the company.

Historically, this profit-inclusion regime was known as GILTI. From 2026 (for tax years beginning after 31 December 2025), the regime is now known as Net CFC Tested Income (NCTI).

For tax years beginning before 31 December 2025, the inclusion was calculated by taking the shareholder’s share of net CFC tested income, reduced by a deemed return on certain tangible business assets (often referred to as the 10% QBAI concept).

For tax years beginning after 31 December 2025, a US shareholder is required to include a CFC’s tested income without any reduction for QBAI.

Without appropriate planning, Christine’s global tax rate on her company profits could have exceeded 80%.

What options did we consider for Christine?

1) Check the box election

We considered whether Christine should make an entity classification election, using Form 8832, to treat the UK company as a disregarded entity for US tax purposes.

This approach would result in the business’s net profit being reported on Schedule C of Christine’s Form 1040 and subject to her individual tax rates, similar to self-employment income reporting rather than bringing the CFC regime into play. A check the box election also allows additional UK taxes to be claimed as a foreign tax credit on her US tax return.

2) The NCTI/GILTI high-tax exclusion election

There is an election that can exclude certain highly taxed tested income from the NCTI regime where the effective foreign tax rate exceeds a threshold linked to the US corporate rate (18.9% based on the current US corporate rate of 21%). Additional consideration has to be given in calculating this rate where an individual has an interest in more than one CFC.

In Christine’s case, the company’s effective UK tax rate was expected to fluctuate (including years where capital allowances reduced the effective rate). Relying on the high-tax exclusion therefore carried the risk of inconsistent outcomes year-to-year.

3) A section 962 election

A section 962 election is an annual election that allows an individual US shareholder to be taxed on certain CFC inclusions using a corporate-style approach. In broad terms, it can allow the income inclusion to be taxed at US corporate rates and can improve the ability to utilise foreign tax credits in that computation (subject to detailed rules and limitations).

However, a section 962 approach can add complexity and may create a later “second layer” of US tax when profits are distributed. It therefore requires careful modelling, based on how profits are expected to be reinvested and extracted over time.

The outcome for Christine

To help Christine make an informed decision, we prepared projected and comparative calculations based on:

• expected profitability and growth.

• cash extraction needs (salary, dividends, and retained profits).

• US foreign tax credit position (and whether credits would be usable).

• administration and compliance costs.

• exit plans and the likely tax profile of a future sale.

Our tailored report enabled Christine to make an informed decision regarding the most suitable method of reporting the UK limited company in the US. For Christine, this meant that the “check-the-box” election was the most appropriate option. Alongside potential tax benefits, the election significantly reduced the complexity and cost of annual US compliance and provided long-term certainty over her tax position:

• There was a one-off Form 8832 entity classification election; and

• Income and expenses reported on Schedule C with Christine’s Form 1040.

• Annual reporting on Form 8858 (information return for US persons with foreign disregarded entities), which is generally more straightforward than Form 5471.

In Christine’s situation, changing the US classification also removed the need to navigate some of the more complex CFC-related US regimes (including Subpart F categories and NCTI calculations).

Christine’s exit strategy contributed to her decision. She wanted to preserve the benefit of UK Business Asset Disposal Relief (BADR). BADR applies a reduced UK capital gains tax rate. Under current HMRC guidance, this is 14% for disposals on or after 6 April 2025 and before 6 April 2026, and 18% for disposals on or after 6 April 2026.

From a US perspective, a sale can also trigger US long-term capital gains tax (and potentially the additional 3.8% Net Investment Income Tax). However, depending on the facts and the structure adopted, it may be possible to reduce or eliminate additional US tax on exit - making the UK BADR rate more meaningful in overall planning. Our straightforward report took a holistic approach, taking into consideration the tax consequences over the life of the company, and provided a well-rounded and simplified comparison of the various routes Christine could take. This format helped eliminate unnecessary stress and ultimately made the decision-making process simpler and more efficient.

No matter what our clients come to us with, we always take the time to fully understand their current position and goals and therefore tailor our advice specifically to their needs.

Other considerations

Subpart F

If your UK company is a CFC and you are a US shareholder, the US can tax you on certain categories of income even if you don’t take the money out.

Subpart F commonly applies to passive or “mobile” income such as dividends, interest, rent, and royalties and can also apply in certain service-company scenarios. Where it applies, the US shareholder is taxed on their share of Subpart F income whether or not it is distributed.

Passive Foreign Investment Companies (PFICs)

PFIC issues often arise where a US person owns less than 50% of the shares or voting rights in a foreign company that is primarily investment-driven (rather than actively trading), or where a trading company accumulates significant passive investments (such as cash).

PFIC taxation can be punitive and typically requires annual reporting on Form 8621, so it’s an area to monitor if your UK company’s balance sheet becomes more investment heavy.

US compliance burden

For many US owners, the compliance burden is as important as the tax cost. Depending on the structure, this can include annual CFC reporting (often via Form 5471 and Form 8858), computations feeding into Forms 8992 and 8993, as well as corporate Foreign Tax Credit Forms 1118.

If an individual also has signature authority (or a financial interest) in a company bank account, this will also have to be reported on their Foreign Bank Account Report.

Get in touch

If you would like advice tailored to your circumstances, please complete the form below and one of our specialists will be in touch to discuss how we can help. Please note that our advisory services are charged at our hourly rates and a formal engagement will need to be in place before any advice is provided. For advisory-only clients, our minimum charge is £2,000 plus VAT.

The full Stepping Stones series can be found here.