HMRC Publishes Consultation on Reform of Taxation of US LLCs

On 10 June 2026, HMRC published a consultation document (Consultation) on reform of the taxation of U.K. resident members of U.S. limited liability companies (LLCs). The Consultation had been widely expected for a few months, with a view to making the U.K. a more attractive destination for globally mobile executives.

The Consultation essentially proposes that U.K. resident individuals are allowed to treat U.S. LLCs, which are currently generally opaque for U.K. purposes, as transparent in order to avoid effective double taxation. Although the Consultation title references only U.S. LLCs, this treatment would also apply to any other entities treated as tax transparent in their jurisdiction of establishment but tax opaque in the U.K. (Reverse Hybrids).

The Consultation explains that no change is proposed to how Reverse Hybrids are treated for corporate holders of interests in Reverse Hybrids and is silent as to whether it is intended that this treatment extends to trusts and other non-individual members.

Issue: High Effective Tax Rates for UK Resident Individuals

The Consultation explains that the government is concerned about high effective tax rates that can arise for U.K. resident individuals due to inconsistencies between how jurisdictions treat certain entities.

In particular, U.S. LLCs are generally taxed transparently in the U.S. (unless a “check the box” entity classification election has been made), whereas in the U.K. most U.S. LLCs are treated as opaque. The result is that a U.K. resident individual member of a U.S. LLC can face a tax rate in excess of 75% because they are chargeable directly on profits, income and gains as they arise in the U.S., and then are taxable again in the U.K. on distributions from the U.S. LLC. Although the U.K./U.S. double tax treaty provides relief, in principle, for double taxation, relief is only available in relation to “the same” income, profits or gains. This condition for relief is not met where, for U.S. purposes, the individual is treated as receiving business profits directly, whereas for U.K. purposes the individual is treated as receiving a distribution from a company.

The Consultation acknowledges that there has been some uncertainty around the treatment of U.S. LLCs in the U.K., particularly since the Anson case (Anson v Commissioners for HMRC [2015] U.K. SC 44) in which the U.S. LLC was held to be transparent. HMRC acknowledge that there are difficulties in reconciling this case (and some rare cases where U.S. LLCs are taxed as transparent for U.K. purposes) and HMRC’s published guidance (in INTM180050) where they express the view that U.S. LLCs are opaque.

Proposal: Transparent Treatment for UK Income Tax and Capital Gains Tax

The government’s preferred approach is to allow U.K. resident individual members in specific eligible Reverse Hybrids to treat their holdings on a transparent basis for the purposes of income tax and capital gains tax. Effectively this would mean that they would be taxed on the underlying income, profits or gains of a U.S. LLC, but would not be chargeable to income tax on distributions from the U.S. LLC. This would enable the U.K. resident individual to claim double tax relief (as the tax would be on the “same” profits).

This would apply not only to U.S. LLCs, but also other entities that are taxed on a transparent basis in their jurisdiction of residence, but which are treated as opaque for U.K. tax purposes.

It is also proposed that the trade or business of the U.S. LLC would be deemed to be carried on in partnership (or as a sole trade for a single member U.S. LLC) with profits and losses being computed accordingly for U.K. income tax purposes (essentially like a partnership). A similar treatment is proposed for capital gains tax purposes.

The Consultation suggests that transparent treatment would be applied automatically, where the foreign entity meets the eligibility conditions. The Consultation does raise the question of whether it should instead be done by irrevocable election.

Alternatives

Other approaches considered, very briefly, in the Consultation are (i) allowing a deduction for foreign tax so that U.K. income tax would be chargeable on distributions net of foreign tax suffered; or (ii) allowing credit for foreign tax on underlying profits against an individual’s U.K. income tax on distributions.

Limitations

The Consultation states that this proposal is not intended to apply to Reverse Hybrids that are treated as U.K. tax resident for U.K. domestic tax purposes or that are trading in the U.K. through a U.K. permanent establishment.

These proposed limitations leave scope for U.K. resident individuals to remain subject to high effective tax rates from certain U.S. LLC and other Reverse Hybrid structures. In particular, a U.S. LLC operating entirely in the U.S. but that is controlled by a U.K. resident could potentially be carved out from these changes.

No Broader Application to Corporates

The Consultation states that no equivalent legislation would be introduced for U.K. resident corporates.

While high effective tax rates may be less of a concern for corporates (including because of the U.K.’s broad distribution exemption), the uncertainty around the tax treatment of U.S. LLCs can present challenges. For example, on financing transactions U.S. LLCs can create concerns in the context of the “qualifying private placement” withholding tax exemption. U.S. LLCs can also present difficulties in “tracing” tax groupings or determining if “share capital” conditions are met.

It would be a missed opportunity if some of these broader issues were not resolved at the same time as reexamining U.S. LLCs more generally.

If the proposals are enacted, challenges could arise where a U.S. LLC has both individual members (which would, following the change, treat the LLC as transparent) and corporate members (where the LLC would remain opaque).

Next steps

The consultation is open until 31 July 2026. No indication is given in relation to when any new regime would have effect.