Why US rules reach a UK company
Section 409A of the US Internal Revenue Code follows the taxpayer, not the company. It does not matter that the company is incorporated in England, that the shares are ordinary shares in a UK limited company, or that the option plan is governed by English law. If the person receiving the option pays US tax, the option needs to comply.
Who counts as a US taxpayer
- Employees, contractors, and advisors who live and work in the United States.
- US citizens and green card holders, wherever they live, including those based in the UK.
- People who become US tax resident while their options are still vesting, for example on a secondment to a US office.
What happens without one
If an option is granted with an exercise price below fair market value, it is treated as deferred compensation that fails section 409A. The consequences fall mainly on the employee:
- The option's value is taxed as income when it vests, not when it is exercised.
- A 20% additional federal tax applies on top of ordinary income tax.
- Interest penalties can apply, and some states add their own tax.
The company has reporting and withholding obligations of its own, and the issue reliably surfaces in due diligence when a US investor or acquirer reviews the option records.
How the safe harbor works
US regulations presume a valuation is reasonable if it comes from an independent appraisal dated no more than 12 months before the grant. The IRS can only set it aside by showing it was grossly unreasonable. That presumption lasts until 12 months have passed or something material changes, such as a new funding round.
Why your EMI valuation is not enough
Many UK companies already hold a valuation agreed with HMRC for EMI purposes. It cannot simply be reused, for three reasons:
- Different standard. HMRC and the IRS define value differently and treat share restrictions and discounts differently. The EMI figure used to set the exercise price is often lower than US fair market value.
- No safe harbor. Agreement with HMRC carries no weight with the IRS. Only a valuation that meets the US rules creates the presumption of reasonableness.
- Different shelf life. An EMI agreement lasts 90 days. A 409A valuation lasts up to 12 months.
For someone taxed in both countries, the exercise price generally needs to be at least the higher of the two values. Our guide to EMI vs 409A valuations sets out the differences side by side.
Options or shares?
Section 409A is mainly about options. If you are issuing shares directly to a US taxpayer, a different rule applies: any gap between what they pay and what the shares are worth is generally taxed as compensation. Where the shares are subject to vesting, the recipient has only 30 days from the award to file a section 83(b) election to be taxed upfront. Either way the company needs a defensible fair market value at the award date, and a 409A-standard valuation provides it.
What a UK company should line up
- Legal structure. US awards are usually made under a US sub-plan or addendum to the UK option plan. Your lawyers will advise on the form of award.
- The valuation. Completed before the grant date, not after.
- Information for the valuer. Cap table, articles of association, any shareholders' agreement, recent accounts and forecasts, and details of your latest funding round, including SEIS, EIS, or venture rounds.
- A refresh cycle. Every 12 months, or sooner after a material event.
If you grant EMI options as well, both valuations can come from one cross-border engagement. For US grants alone, see our 409A valuation service.
Frequently asked questions
Does a UK company with only one US employee need a 409A valuation?
If that employee is being granted share options, yes. Section 409A applies to the individual award, so the number of US employees makes no difference.
Can we use our HMRC-agreed EMI valuation for US employees?
Not on its own. An EMI valuation is prepared to UK standards for HMRC and does not give safe harbor protection under US rules. A 409A valuation is a separate report, although it can be built on the same underlying analysis.
We are issuing shares, not options. Do we still need a valuation?
Usually, yes. When a US taxpayer receives shares for less than their fair market value, the difference is generally taxable as compensation, so you still need a supportable fair market value at the date of issue. A 409A-standard valuation is the normal way to evidence it.
Does a US citizen living in the UK count?
Generally yes. The US taxes its citizens and green card holders on their worldwide income wherever they live, so an option granted to a US citizen working in London can be subject to 409A as well as UK rules.
How long does it take?
We deliver a draft conclusion within 10 business days of receiving a complete set of information.
This page is general information, not tax or legal advice. It reflects US and UK rules as we understand them in October 2026; confirm how they apply to your company with your advisers.