For UK residents with interests in the United States, a US limited liability company (US LLC) can appear to be a simple and tax-efficient vehicle for running a business or holding investments. However, HMRC and the IRS classify LLCs in fundamentally different ways. This mismatch can result in UK-resident members of US LLCs being taxed twice on the same profits, with HMRC acknowledging that the effective tax rate can exceed 75%.
The UK Government has now finished a consultation on reforms aimed at providing matching transparent tax treatment for qualifying UK residents who are members of US LLCs. This consultation closed on 31 July 2026, and we are now waiting to hear about the proposed changes. This article covers the UK tax position for US LLC members, including why double taxation arises, where the Government’s reform proposals currently stand, and the implications of the Anson v HMRC case.
If you hold or are considering acquiring a membership interest in a US LLC, it is vital to seek expert guidance on your personal tax position. Our US and UK Tax Accountants can help address international tax concerns and ensure that your tax position is managed efficiently.
Table of Contents
The Issue: Tax Mismatch of U.S. LLCs
Under US LLC federal tax rules, an LLC’s profits are attributed directly to its members when they arise, whether or not they are distributed. This is known as transparent tax treatment. In contrast, HMRC treats most US LLCs as entities separate from their members, with UK tax being applied when the LLC distributes its profits. This is known as an opaque tax treatment.
For a UK tax resident, US tax is required on profits when they arise in the LLC, with further UK tax applied when the same profits are later distributed. HMRC does not allow the US tax to be credited against the UK liability. The LLC is therefore treated as a reverse hybrid, resulting in double taxation.
The UK-US tax treaty does not prevent double taxation on US LLC income automatically. Double taxation relief requires both countries to tax the same profits, income or gains. The crux of this issue is that for US LLCs, this is not the case.
US LLC Classifications: Check the Box Election
A single-member LLC remains a separate legal entity, but the IRS does not treat it as separate from its owner for federal income tax purposes. Its profits are reported directly on the owner’s tax return. An LLC with two or more members is treated as a partnership, with each member taxed on their share of its profits. Both are forms of transparent tax treatment.
An LLC can instead make a ‘check the box’ election by filing form 8832, which allows it to be taxed as a corporation. The LLC then pays US federal tax on its profits, while its members may be taxed on distributions they receive. This is an opaque tax treatment, which more closely matches HMRC’s treatment of most US LLCs.
What Does the Tax Mismatch Mean for UK Members?
For members of an LLC that is transparent in the US but opaque in the UK, the same economic profit is taxed at different stages. US tax applies to the member’s share of profits as they arise, whether those profits are distributed. When the LLC later distributes the profits, HMRC taxes the gross distribution as foreign dividend income.
HMRC does not normally allow the US tax paid on the underlying profits to be credited against the UK tax on the distribution because it regards them as different income. The member can therefore bear both US tax on the profits and UK tax on the subsequent distribution.
For an individual who has used all available allowances and whose income already falls within the highest tax bands, the maximum marginal-rate position on £100,000 of LLC profit that is subsequently distributed is as follows:
| Tax Charge | Calculation | Tax Amount |
|---|---|---|
| US Federal income tax | 37% of £100,000 of LLC profit | £37,000 |
| UK additional rate dividend tax | 39.35% of a £100,000 distribution | £39,350 |
| Combined tax without UK credit relief | £76,350 |
The combined effective tax rate for this example is 76.35% for the highest marginal taxpayers. While this rate does not apply to every member of an LLC, it highlights the impactful significance of double taxation from the distribution of profits from a US LLC to UK residents.
Anson v HMRC
Anson v HMRC is an important case that challenged HMRC’s approach to taxing UK resident members of US LLCs and determining whether they can claim double taxation relief.
In 2015, the Supreme Court ruled that Mr Anson, a UK resident member of a Delaware LLC, was entitled to double taxation relief. The LLC in which he was a member was treated as a partnership in the US, where he paid federal and state tax on his allocated share of its profits. The dispute was whether his UK liability related to those same profits or to a separate distribution from the LLC.
Based on the LLC agreement and the evidence presented in Delaware law, the court found that Mr Anson had an interest in the profits as they arose. The US and UK taxes therefore applied to the same income, allowing the US tax to be credited against his UK liability.
The Anson v HMRC decision however did not establish that every Delaware or US LLC should have transparent tax treatment in the UK. Any member seeking the same treatment must demonstrate that their legal rights are comparable to those considered in Anson v HMRC.
HMRC maintains that an LLC’s profit will normally belong to the LLC until a member becomes entitled to a distribution. HMRC has hardened its position following the legal dispute, providing official guidance on the Anson and Delaware LLCs. It confirms that an LLC’s US tax classification does not determine who owns its profits for UK tax purposes. While the Anson case remains relevant, its significance at mitigating against double taxation is limited to specific legal facts.
Consultation by UK Government
The uncertainty following Anson v HMRC, together with the high effective tax rates faced by UK resident LLC members, prompted the Government to launch a seven-week consultation on the taxation of UK resident members of LLCs. It considered three possible reforms to reduce double taxation for individual members impacted by reverse hybrid entities.
Main Proposal: Matching Transparent Treatment
During the consultation, the Government’s preferred option was matching transparent treatment. This would apply automatically to UK-resident individuals whose LLC is transparent in the US but treated as opaque by HMRC. Members would be taxed in the UK on their share of the LLC’s underlying profits, income and gains, rather than on subsequent distributions.
For trading activities, a multi-member LLC would be treated as a partnership and a single-member LLC as a sole trader. Investment income and capital gains would be attributed according to each member’s interest and calculated under UK tax rules. As the UK and US would tax the same underlying income, double taxation relief would then be available on the US tax paid. Distributions would not be taxed again as dividends in the UK.
The consultation also proposed two alternative options, which would retain the opaque UK tax treatment:
- Deduction for foreign tax: UK tax would be calculated on the distribution after deducting the foreign tax previously paid on the underlying profits.
- Credit for foreign tax: The foreign tax would be credited directly against the UK tax due on the distribution.
A credit would reduce the UK tax liability directly, while a deduction would only reduce the amount of income subject to UK taxation.
Consultation Outcomes
The consultation closed on 31 July 2026. To date the government has not published its response, drafted any legislation or provided an implementation date. The proposals have therefore not been passed into law, and UK resident members of US LLCs are still subject to the current rules.
The proposed matching treatment would apply prospectively, from tax years following the introduction of any legislation. The consultation did not propose retrospective relief for double taxation suffered in earlier years. It was also limited to UK-resident individuals, with no equivalent change proposed for UK corporate members of LLCs.
Until any tax reforms become law, members should not assume that any double taxation relief is available or amend future investment decisions based solely on the consultation. It is important to seek UK and US tax advice, before taking a distribution, changing an LLC’s tax classification or restructuring a membership interest.
Conclusion
UK-resident members of US LLCs remain exposed to double taxation where the LLC is transparent in the US but opaque in the UK. The US may tax members on profits as they arise, while HMRC later taxes distributions without normally allowing credit for the US tax paid on those profits. Although Anson v HMRC established that relief may be available in specific circumstances, HMRC does not accept that the ruling applies to US LLCs generally. The Government has consulted on matching transparent treatment, but no legislation has been introduced, and the existing rules remain in force.
If you hold or are considering acquiring a membership interest in a US LLC, it is important that you seek specialist advice before receiving a distribution, filing a tax return or changing the LLC classification.
Get in touch with our team who can help identify potential double taxation and work alongside your US advisor to help manage your tax position.