UK businesses are increasingly tackling the challenge of hiring from a global talent pool.  In some sectors – particularly the tech sector – it's common for the management team to include UK and US-based individuals.  Sometimes it's just the one key hire that makes the most sense – in a hybrid working world, what difference does 5,000 miles make?  But this raises the question: how to keep a spread-out team comparatively incentivised?

In the UK, for many small and medium-sized companies, we have accessible and highly tax efficient employee share option schemes for UK resident employees, with Enterprise Management Incentive (EMI) options being the gold standard.  Companies which can't qualify for EMI sometimes implement CSOP options, but in this article we're focused on EMI options, which received a boost in the 2025 Budget. 

But what happens when UK companies grant share options to US employees? Whilst generally feasible, differences between the UK and US tax systems and valuation regimes can produce unexpected outcomes. If you don't plan for these, you risk unexpected tax liabilities and disappointing employees at the time of exercise.

How the US tax treatment of options differs from the UK

US tax treatment

US employee share options broadly fall into two categories: 

• 'Incentive Stock Options' (ISOs)
• 'Non‑qualified Stock Options' (NSOs). 

ISOs are potentially tax advantaged and the closest thing that the US has to EMI options in the UK.  However the tax advantages are harder to access. 

Where the exercise price is at least the "fair market value" of the underlying shares at grant, there is typically no US income tax on grant for either ISOs or NSOs.  That's already more restrictive than the UK; in the UK it's fine to grant options with an exercise price below market value without triggering upfront tax charges. Granting US options that don't meet this requirement can also trigger a 20% penalty federal tax charge to the employee, under the US's notorious 'section 409A tax regime'.

Broadly, qualifying ISOs are not subject to ordinary federal income taxes on exercise and deliver lower capital gains tax rates on the sale of the resulting shares, but only if certain additional conditions are met. These include that the employee holds the acquired shares for at least one year post‑exercise and two years post‑grant. That's not compatible with the common UK approach of granting options which are only exercisable just before an exit (commonly known as 'exit only' options).

For NSOs (and ISOs that do not meet the holding periods), the "spread" at exercise (fair market value at exercise minus the exercise price) is taxed as ordinary income and is generally subject to US federal income tax rates, FICA (Social Security and Medicare), and applicable state and local taxes.  That's broadly similar to non-EMI options in the UK – although some states like New York and California have high state tax rates, which can lead to a large total tax cost.

UK tax treatment 

For employee options, no UK income tax arises on grant. Unlike the US, there is generally no requirement for the exercise price of non-tax advantaged ("unapproved") options to equal market value at grant, although this is a requirement for CSOP options. For EMI options, any discount is generally subject to income tax (and possibly NICs) but only on exercise.

On exercise of unapproved options, the spread is taxed as UK employment income (rates up to 45%). If the shares are "readily convertible assets", PAYE and both employee's and employer's NICs will generally apply. On a later sale of the shares, any further gains are typically subject to capital gains tax. 

Where EMI options are used, the income tax and NICs which would otherwise have arisen at exercise can be reduced or eliminated if the qualifying conditions are met, with capital gains tax (and possibly business asset disposal relief) applying on a later sale of the shares. 

For these reasons, EMI options are much more flexible than ISOs in the US.  There is no minimum holding period for accessing capital gains tax rates on growth in value, and the exercise price can be set in a way to suit the parties' commercial needs.

UK vs US valuations

UK tax valuations commonly apply discounts for minority holdings and share restrictions. For EMI and CSOP options, it is possible to get HMRC's agreement to the valuation in advance, which can support lower tax values for grants to employees receiving small percentage holdings.

For options granted to US employees, a "409A valuation" — a formal US appraisal of the fair market value at grant — is critical. A robust 409A valuation provides a safe harbour that underpins the exercise price for both ISOs and NSOs and mitigates exposure to unexpected tax liabilities and penalties under the 409A regime. 

Due to different valuation methodologies, a 409A valuation can often produce a higher price per share than a UK valuation, even when performed for the same company at the same moment in time. 

For both UK and US valuations, it is important to obtain the advice of qualified independent valuers to ensure the correct methodologies are applied. 

How can you manage the differences – and mitigate the disparities?

When granting options to US employees, as well as seeking US legal input on the draft documents you will need to consider the following: 

• Exercise price – Do not use a UK valuation to set the US option exercise price. Obtain a 409A valuation and set the exercise price at or above that value to secure the safe‑harbour protection.
• Bridging UK vs US valuations – If the 409A valuation is materially higher than the UK valuation, consider either increasing the number of shares under the US option to offset the higher exercise price, or aligning the exercise price of the UK options with the 409A valuation, or even granting a cash bonus to help equalise the position.
• Exit‑only grants – If you wish to grant "exit-only" options and the UK options can be granted as EMI options, US option holders may face higher tax when the options are exercised on the exit. To address this, consider increasing the number of shares under the US option. This is often preferable to having to manage disappointed US option holders at exercise, which may require the provision of a bonus to cover the increased tax liability.
• Tax deferral – Where proceeds from a sale of shares includes a reinvestment / equity component in the buyer, it is often possible for that reinvestment to be structured as a 'rollover' transaction for UK capital gains tax purposes, meaning that some tax can be deferred for UK management.  That might not be possible for US based optionholders so this may place additional constraints on their cashflow.  Again cash bonuses may be necessary to ensure they have an acceptable net cash receipt on sale.
• Internationally mobile employees – Where employees are internationally mobile, the US and UK may both assert taxing rights on any option gains based on the option holder's place of work between grant, vesting and/or exercise. Time‑apportionment and treaty relief may apply. Maintain precise work‑history records and coordinate US/UK payroll to manage withholding correctly at exercise and, where relevant, at sale.

It's far better to resolve these points before grant than at exercise (especially for exit‑only options), when timelines are tight and the room to correct course is limited.  Alternatively, you can start to model post-tax outcomes in the run-up to an exit, to make sure that you have a reasonable idea of what US and UK individuals will be taking away in after-tax cash.  Showing employees that you've considered matters from their perspective and (where appropriate) offering to top them up with cash bonuses will go a long way towards taking the sting out of an unattractive tax bill.

The information in this article is correct at the time of publication.