Wait and LLC? Why UK residents are still taxed twice on US income

Whilst the UK Chancellor attended the IMF Spring Meetings in Washington in April primarily to talk trade, growth and transatlantic cooperation, there is a quieter but increasingly urgent issue in the background: the potential double taxation of UK residents who hold interests in US limited liability companies (LLCs).

As recently reported by the Financial Times, Rachel Reeves has instructed the Treasury to examine the tax rules that can result in double taxation for UK-resident members of LLCs, with a consultation to be launched in due course. This acknowledgement sits squarely within the Government’s broader efforts to present the UK as an attractive and fiscally stable “safe harbour” for internationally mobile individuals in an increasingly volatile world.

This is not a niche issue, as LLCs are one of the most common business vehicles used within the United States. Yet for UK residents with interests in LLCs, they have become a textbook example of how legal form, tax classification and policy inertia can combine to produce outcomes that are widely acknowledged to be unsatisfactory yet remain substantially unaddressed.

The issue

UK residents who are members of LLCs can routinely be taxed twice. The individual is subject to US tax on the profits of the LLC as they arise, and UK tax is then imposed when those profits are distributed by the LLC to the individual. Treaty relief is commonly denied on the basis that the two taxes are not charged on the “same income”.

The difficulty is structural, as the US generally treats LLCs as tax transparent, but the UK generally treats the same LLCs as opaque corporate entities. The UK/US tax treaty requires symmetry, and HMRC’s position is that a share of the profits and a later distribution of those profits are fundamentally not the same income.

The result is harsh but predictable. The US treats the profits of the LLC as arising to the member and taxes those profits accordingly, while the UK taxes that same money separately as income of the individual on extraction from the LLC, which results in effective treaty relief being denied. For individuals, this can mean an effective tax rate of more than 60% on an LLC’s profits.

Winning the case, losing the argument

The issue was considered in a Supreme Court case from more than a decade ago: Anson v HMRC [2015] UKSC 44.

In Anson, the Supreme Court held that a UK resident member of a US LLC could, in principle, claim double tax relief under the UK/US tax treaty. The reasoning was straightforward: if US tax and UK tax are charged on the same profits or income, treaty relief should be available. In Mr Anson’s case, the court accepted that under Delaware law and the LLC agreement, the profits of the LLC belonged to him as they arose and therefore the LLC was essentially transparent for UK tax purposes. The later distribution was just the mechanics of payment, not a new source of income.

In theory, the decision solved the problem and aligned UK and (typical) US treatment of LLCs. In practice, HMRC had different ideas, discounting Anson as being fact specific and not of wider application. HMRC reaffirmed their position in updated guidance issued in December 2023, stating that (a) the judgment was based on the First-Tier Tribunal’s finding of fact on foreign law and as such, it is not binding in subsequent cases and (b) based on their understanding of Delaware LLC law, and contrary to the conclusion reached in Anson, they continue to view the profits of an LLC as belonging to the LLC in the first instance, not to the members.

From theory to triage

This is not merely a technical point. It can have real consequences for internationally mobile individuals and investors, and can be a material deterrent for US individuals looking to relocate to the UK (especially where other European jurisdictions, for example France, have established systems to better deal with the potential mismatch).

There are (in broad terms) two ways in which this impasse could be resolved. HMRC could revisit its approach, and accept LLCs as transparent in appropriate cases. Alternatively, Parliament could legislate, or the UK and US could issue a joint statement clarifying how the treaty should apply where entities such as LLCs are treated differently in each jurisdiction, to provide certainty on the point. Neither route would be radical. This would simply restore the outcomes that the treaty was intended to achieve, namely the alleviation of double taxation.

As the UK seeks to deepen its economic relationship with the United States, this is an issue that warrants attention. Ambitions to attract inward investment and internationally mobile talent sit uneasily alongside a regime that continues to impose double tax on one of the most widely used US business structures.

We welcome the consultation, but for now, the position remains unresolved. UK-resident owners of US LLCs should proceed with care, as assumptions in this area carry risk, and well-informed timely advice remains essential.

We have extensive experience in advising clients from the US in relation to US/UK cross-border matters. If you would like to discuss how these issues apply to your own circumstances, we would be very happy to help.