EOT relief is a UK exemption. The US taxes its citizens on the whole gain - and where the UK charges nothing, there is no UK tax to credit against it.
Selling a UK trading company to an Employee Ownership Trust has become one of the country's most-used exit routes, because a qualifying disposal attracts a statutory UK capital gains tax relief. If the seller is a US citizen, that relief does not travel: the US taxes its citizens on worldwide income, gives an EOT sale no special status, and can charge the entire gain. And because the US foreign tax credit relieves only foreign tax actually imposed, any part of the gain the UK exempts produces nothing to credit - so an American seller can pay full US tax on that slice with no offset at all.
GOV.UK describes an EOT as a special type of trust set up to hold a controlling interest in a trading company, for the benefit of the employees. HMRC's Capital Gains Manual confirms the relief is available for disposals made on or after 6 April 2014 that meet the requirements.
The most important point for anyone reading older material: this is no longer a full exemption. GOV.UK states that for disposals on or after 26 November 2025 that meet the conditions, half of the gain is exempt from CGT and the remaining half is charged according to the normal rules; for disposals on or before 25 November 2025, the full gain was exempt. The accompanying policy paper frames it from the other side - 50% of the gain will be treated as the disposer's chargeable gain, with the balance held over and deducted from the trustees' acquisition cost.
Two pieces of UK timing matter. Relief is only available for disposals taking place during the tax year in which the trustees acquire the controlling shareholding. And if the EOT ceases to meet the conditions at any time in the four tax years following the tax year of disposal, that may trigger a disqualifying event, in which case relief may not be claimed and any relief already claimed is withdrawn - so a UK position that looks settled at completion is not final for years.
HMRC's manual sets out the requirements separately: a trading requirement, an all-employee benefit requirement, a controlling interest requirement, a limited participation requirement, and related disposal, trustee residence, trustee independence and consideration requirements.
Every one of these is a UK test drafted for UK purposes: meeting them tells you what the UK will charge, and nothing about the US.
US citizenship is the hinge, and it is indifferent to where the seller lives. The IRS states that you are subject to tax on worldwide income from all sources, with the filing rules generally the same whether you are in the United States or abroad.
There is no US analogue to EOT relief. To the IRS this is simply a sale of shares in a foreign corporation, computed under US rules - which produces three compounding divergences.
Sellers assume that if the UK taxes lightly and the US taxes fully, the foreign tax credit evens things out. It does the opposite, and this is where the money is.
The IRS sets out four tests a foreign tax must meet to be creditable: the tax must be imposed on you; you must have paid or accrued it; it must be the legal and actual foreign tax liability; and it must be an income tax, or a tax in lieu of one. The IRS also confirms you can claim a credit only for foreign taxes imposed on you, and that amounts not actually owed do not qualify.
Apply that to an EOT sale. On the exempt portion the UK imposes nothing: nothing is paid, nothing is accrued, there is no actual liability - so there is no creditable foreign tax, and the US charge on that portion stands alone. Under the current rules a seller may credit UK tax on the chargeable half, subject to the ordinary limitations; under the pre-26 November 2025 position, a fully UK-exempt sale could leave an American with a US bill and no credit at all.
Two further constraints surface late. The credit is limited by category and by the source of the income, and whether gain on UK company shares is foreign-source for a US citizen turns on the sourcing rules, the seller's residence and any treaty resourcing provision - it is not automatic. Unused credits from other years rarely rescue the position either, since they sit in their own categories; our explainer on the foreign tax credit carryover for US expats sets out why.
EOT transactions are rarely funded up front. The trust typically pays the seller over several years out of the company's future profits - what makes employee ownership affordable, and what creates the cash-flow problem for an American.
The UK anticipates this. GOV.UK notes that applications to pay tax by instalments may be made where consideration instalments begin no earlier than the date of disposal, extend over a period exceeding 18 months, and continue beyond the date on which the tax would otherwise be due.
The US has separate machinery. Form 6252 reports income from an installment sale on the installment method, and the IRS describes an installment sale as, generally, a disposition of property where at least one payment is received after the end of the tax year in which the disposition occurs. An EOT earn-out resembles that on its face - but it should not be assumed. Whether the method is available on your facts, whether it is desirable given any interest charge on deferred tax, and whether an election is required are questions for a US adviser working from the documents. A UK instalment arrangement does not bind the IRS, and a US election does not change the UK position.
The failure mode is specific: a US liability crystallising on the full gain in year one against consideration arriving over five or more years.
Seen from the US, a UK EOT is a foreign trust. The reporting vehicle is Form 3520, Annual Return To Report Transactions With Foreign Trusts and Receipt of Certain Foreign Gifts, which US persons use to report certain transactions with foreign trusts, ownership of foreign trusts under Internal Revenue Code sections 671 through 679, and receipt of certain large gifts or bequests from certain foreign persons.
Whether any of that touches a particular seller depends entirely on the facts, and no one should read a conclusion here their circumstances do not support. The questions are factual: is the US person a beneficiary, for instance as an eligible employee; are they a trustee, or proposed as one; and is any amount received from the trust rather than from the company. There is a UK dimension too, since HMRC's requirements include trustee residence and trustee independence - so a seller's wish to sit on the trustee board has consequences on both sides. Our article on foreign trusts and Form 3520 for US persons in the UK covers the framework; analyse the trustee question before any appointment, not after.
Most EOT sellers stay with the business, which is usually good for the company but creates a US characterisation question the UK documents may not address. Where a seller works for the company and is also owed deferred consideration, the allocation between sale proceeds and remuneration for services is a recurring area of dispute, and amounts treated as compensation are taxed differently from capital gain. Vendor loan notes raise a parallel point: any interest element is income rather than gain in both systems, but the two do not necessarily recognise it at the same time or in the same amount. Drafting the consideration mechanics with the US characterisation in view costs far less than arguing later.
None of this is a reason to reject an EOT - employee ownership is often an excellent outcome for a founder who cares what happens to the business. The point is narrower: the economics are modelled on a UK-relieved gain, and an American seller is not getting that deal.
1. Model the US liability on the full gain before heads of terms, in US dollars from a US basis.
2. Establish the UK position under the current rules - which portion is exempt, which chargeable - and price the available credit accordingly.
3. Test foreign tax credit availability specifically: source, category and any treaty resourcing, rather than assuming an existing balance covers it.
4. Settle the deferred-consideration question early, aligning the payment schedule with when US tax falls due.
5. Decide the trustee and beneficiary position deliberately, with the foreign trust analysis done in advance.
6. Build the disqualifying-event window into the risk allocation, since UK relief can be withdrawn within four tax years while the US position has already been reported.
Structuring is highly fact-dependent, and nothing here is a recommendation to pursue, or to avoid, a sale to an Employee Ownership Trust.
We are usually brought in alongside the seller's existing UK advisers to own the US side of a transaction designed without it: computing the gain on US principles, testing what credit is genuinely available, modelling deferred consideration against the US liability, and saying plainly where the two systems disagree before signing. A licensed CPA or Enrolled Agent reviews and signs off every US filing; an ACCA-qualified accountant reviews the UK side.
Our US-UK cross-border business tax service sets out the engagement, our US-UK expat tax service covers the personal filings that follow a sale, and selling a UK business as a US citizen covers the wider cost of an exit. If an EOT sale is on the table and a US citizen is on the share register, book a confidential consultation before the structure is fixed.
This article is general information, not tax or legal advice, and does not create a professional relationship. It is not a recommendation to pursue or avoid any particular transaction or structure. Outcomes are highly fact-dependent and the rules change - confirm the current position with a licensed professional before acting.
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Reviewed by a CPA / Enrolled Agent. Last updated: 19 September 2026.
Official sources: GOV.UK HS277 | GOV.UK EOT relief reduction | HMRC CG67800 | HMRC CG67800C | HMRC CG67821 | HMRC CG67837 | HMRC CG67850 | HMRC CG67855 | IRS citizens abroad | IRS qualifying foreign taxes | IRS foreign tax credit | IRS Form 6252 | IRS Form 3520