The UK finally answers the US LLC double tax problem

Figures relate to tax year 2026-27 (UK)

If you live in Britain and own part of a US LLC, you may be paying tax twice on the same profit. America taxes you on the profit as it arises. Britain taxes you again when the money reaches you.

On 28 October 2026 the government said it will fix this with a new credit. But claims only open in early 2028, and the detail is still to come.

This guide explains why the mismatch happens, what the new credit is meant to do, and what you can sensibly do in the meantime.

Key takeaways

• HMRC treats a US LLC as a company, not a partnership.
• America usually taxes LLC members on profits as they arise.
• The two charges sit on different bases, so the treaty gives no credit.
• Respondents reported effective rates of 55% to 75%, and some above 90%.
• The government chose an elective credit, not a switch to transparency.
• Claims for the new credit open from early 2028.
• Distributions stay taxable at UK dividend rates.
• US federal, state and local taxes should all count towards the credit.

What is a reverse hybrid?

A reverse hybrid is an entity that one country looks through and another treats as a company. An American LLC is the standard example. America usually taxes the members directly, while HMRC generally treats the LLC as a separate company whose members are taxed only on what it pays out.

That single difference in labels drives everything else in this article. Neither country is doing anything unusual by its own rules.

The trouble is that the two sets of rules never meet in the middle.

Why does HMRC treat a US LLC as a company?

HMRC classifies foreign entities by looking at the foreign law and the entity's own documents, not at how the other country taxes it. Its list in the International Manual records a US LLC as opaque, a view it has held since June 1997. So, for UK purposes, the LLC is a company and you are a shareholder.

According to HMRC guidance at INTM180040, how the entity is taxed abroad is not relevant to that analysis. That sentence is the root of the problem.

HMRC does accept that its view of a specific entity can vary with the facts. In practice, though, most UK filers start from the opaque position.

How does America tax the same US LLC?

By default America does not tax the LLC itself. A single-member US LLC is usually disregarded, and one with two or more members is usually a partnership. Either way, the profit flows through to the members, who pay federal tax, and often state tax, in the year the profit arises.

That happens whether or not any cash leaves the business. A member can owe American tax on profit that is still sitting in the company's bank account.

So the US charge lands early, on your share of profit, and the UK charge lands later, on the cash you take out.

What went wrong under the treaty?

The UK–US treaty only gives relief where both countries tax the same income. Here America taxes your share of profit, while Britain taxes a dividend. Because the charges sit on different bases, the treaty does not match them, and the American tax cannot reduce the British bill.

The government's own consultation said exactly this. It described the difference in basis as what stops the treaty from giving double taxation relief.

The result is two full charges on one stream of profit, with no credit on either side.

How high could the effective rate go?

The consultation asked members to report their real experience. According to the summary of responses, effective rates commonly ran from 55% to 75%. Several respondents cited rates above 80%, and some examples went beyond 90% once US state and local taxes were added on top.

Those figures came from 64 written responses, mostly from professional bodies, law firms, tax agents and investors.

For comparison, a basic rate UK taxpayer pays 10.75% on dividends in 2026-27. The gap is the whole story.

A worked example of the double charge

The figures below are purely illustrative and ignore allowances, exchange movements and timing. Take a UK resident additional rate taxpayer who owns all of a US LLC. The LLC makes $100,000 of profit in a year and pays it all out.

First, America taxes the member on the $100,000 as it arises. Assume, for illustration, a combined federal and state rate of 30%, so $30,000 of US tax.

Second, Britain taxes the $100,000 distribution as a dividend at 39.35% for 2026-27, which is $39,350. Because the treaty does not match the two charges, there is no credit.

So the total tax is $69,350 on $100,000 of profit, an effective rate of about 69%. That sits right inside the range the consultation reported.

How the two systems compare

What did Anson decide?

In 2015 the Supreme Court decided George Anson v HMRC. It found that Mr Anson's share of a Delaware LLC's profit was his income as it arose, so he could claim credit for the American tax. That looked like a way out for every UK member of a US LLC.

It was not. HMRC published Revenue and Customs Brief 15 (2015) shortly afterwards.

That brief said HMRC would keep treating these LLCs as companies, because the ruling turned on the specific facts and the specific LLC agreement.

Can you still rely on Anson?

Some people do, but it is a contested position rather than a safe one. HMRC's stated view is that Anson applies to its own facts. If you file on an Anson basis, you should expect HMRC to examine the LLC agreement and the governing state law closely.

According to the consultation summary, relief on an Anson analysis did succeed in some cases. Respondents called those cases marginal and fact-specific.

In our practice we treat an Anson filing as something to disclose clearly, never something to slip through quietly.

What has the government now decided?

On 28 October 2026 the government said it will introduce a new elective domestic credit for individual members of reverse hybrids. You would elect to claim credit against UK tax for foreign tax you paid personally on the entity's profits, income and gains. Claims open from early 2028.

The government rejected the other main option, which was to treat these entities as transparent. It said transparency would need too much new machinery and would exclude many founders and family businesses.

It will run a technical consultation on the detail first, and then legislate in a future Finance Bill.

Which entities will the new credit cover?

The government expects to list eligible entities in legislation. The named examples are US LLCs, US S corporations, Jersey LLCs and French sociétés civiles immobilières. For an individual member, each listed entity would be opaque for UK tax, so you would pay UK tax on distributions rather than on profits.

So the new rules confirm the opaque treatment rather than reverse it. The relief comes through the credit, not through a change of label.

Respondents asked for a clear list so that members would not need an expensive classification opinion every year.

How will the credit be worked out?

The government plans to base the credit on the average rate of foreign tax you pay, using mechanical rules rather than tracing each dollar. Federal, state and local taxes should all count. The aim, in its words, is a rate often broadly comparable to running the business through a UK limited company.

Several technical questions remain open. These include mixed sources of income inside one entity and timing gaps between the American charge and the UK distribution.

The interaction with devolved income tax rates is also on the list for the technical consultation.

How might the example look under the new US LLC credit?

Using the same illustrative figures, the UK dividend charge stays at $39,350. If the full $30,000 of American tax were creditable, the UK bill would fall to $9,350. Total tax would then be $39,350, an effective rate of about 39%.

That outcome is only a sketch. The real credit will depend on rules that do not exist yet.

Still, it shows the scale of what is at stake. On these numbers the credit would save about $30,000 a year.

What happens between now and 2028?

Nothing changes in law yet. Until the new credit applies, a UK resident member of an LLC faces the same mismatch as before. The government has said it is considering practical options for earlier periods and ongoing disputes, but it has not announced any relief for them.

So the next two UK tax years still matter. Planning that reduces distributions or the US charge in that window keeps its value.

Equally, a hasty restructure now could cost more than it saves if the credit arrives as planned.

Should you change the entity's US tax classification?

An LLC can elect, with Form 8832, to be taxed in America as a corporation. Then the entity pays US tax itself and both countries see a company, so the mismatch largely disappears. But the election has knock-on effects, and the consultation responses called it imperfect.

For a US citizen owner, a corporate election can bring other American regimes into play. For other investors, it can change the tax position of every member.

Our guide to the check-the-box election sets out how the election works and when it can be reversed.

Does the FIG regime help?

The foreign income and gains regime gives qualifying new arrivals full relief on foreign income and gains for their first four years of UK residence. Distributions from a US LLC are foreign income, so a qualifying new resident can claim relief on them during that window.

The relief has to be claimed, and it carries its own costs. Claimants lose their personal allowance and capital gains allowance for the year.

Once the four years end, the full mismatch returns. For many arrivals that will fall before 2028.

What about US citizens who live in Britain?

US citizens face the mismatch from the other direction. America taxes them on LLC profits anyway, and they may try to credit the UK dividend tax on their US return. According to the consultation summary, the IRS often refused that credit because the UK charge was not on the same basis.

Timing, character and sourcing rules can also cut the American credit to little or nothing. So a citizen can end up with the same double charge.

Respondents noted that relief on an Anson basis had mostly helped US citizens. That remains a narrow route.

Does a single-member US LLC need extra US forms?

Yes, often. An LLC owned by a non-American is usually a foreign-owned disregarded entity for US purposes. It must file Form 5472 with a pro forma Form 1120 each year, even with no US tax due. Missing it can trigger a $25,000 penalty.

That filing sits alongside everything in this article, and the new credit will not remove it.

Our guide to Form 5472 for UK owners covers the reporting in detail.

Should you close the LLC instead?

Closing the entity ends the mismatch for future profits, but it is rarely free. Winding up can trigger American tax on the assets, and HMRC may treat the final payout as a distribution or a capital receipt. For an active trading business, closure is usually the most expensive option.

With a credit now promised, the case for closing in a hurry is weaker than it was a month ago.

If you are weighing it anyway, see our guide to closing a US LLC from the UK first.

What records should you keep now?

Keep evidence of every dollar of US tax you pay personally on the LLC's profits, by year and by entity. Keep the federal return, any state returns, the K-1 or equivalent profit statement, and proof of payment. The new credit will rely on information that investors already hold.

Record each distribution with its date, amount and exchange rate. The timing of distributions against the US charge will matter.

If the government offers anything for earlier periods, these records will be the evidence for it.

Will the new rules apply to minority investors?

The government chose the credit route partly because it works for minority and indirect investors. Transparency would have needed information that a small member of a large fund cannot get. A credit needs only what the member already knows about their own US tax.

Most respondents also wanted no minimum holding size. The government's response did not add one.

So a small holding in a US investment fund structured as an LLC should fall within the scope.

Common mistakes and penalties with a US LLC

The first mistake is reporting the LLC on a UK return as a partnership without a clear Anson position and disclosure. HMRC can treat that as an inaccuracy, and penalties follow.

The second is assuming the treaty fixes everything. It does not, for the reasons above.

The third is a rushed restructure in late 2026 that triggers US tax and becomes pointless in 2028.

The fourth is forgetting Form 5472 on a single-member entity, where the fixed penalty is $25,000.

How to prepare a US LLC holding for the new credit

1. List every LLC you hold, directly or through another vehicle.
2. Record the LLC classification in America and HMRC's view of it in Britain.
3. Collect US federal, state and local tax returns and payment proofs by year.
4. Record each distribution with its date, amount and exchange rate.
5. Check whether you qualify for the FIG regime and for how long.
6. Model the next two years with and without distributions.
7. Review any Anson-based filing and make sure it was disclosed.
8. Watch for the technical consultation and respond if you are affected.

How US UK Tax Accountants helps

We prepare both sides of the return for UK residents with American business interests. That means the US federal and state filings, Form 5472 where it applies, and the UK Self Assessment return with the LLC reported on a position you can defend.

We also model the next two tax years, so that any change you make before 2028 still makes sense once the credit arrives. Our business tax service covers owners on both sides of the Atlantic.

If you are paying tax twice on the same profit, contact our team and we will look at the figures with you.

Last reviewed 29 October 2026. This article is general information and not personal tax advice. The new credit is a government proposal and the final rules may differ.