For UK residents investing through a US LLC, a technical mismatch between the UK and US tax rules can turn the same profits into a double tax problem.
UK resident individuals who invest through US Limited Liability Companies (LLCs) can face unexpectedly high tax bills because the UK and US often treat those entities differently for tax purposes. The UK government’s Consultation on reform to taxation of UK-resident members of LLCs and other reverse hybrids, published on 10 June 2026, proposes reforms that could allow affected taxpayers to secure more effective relief from double taxation. If implemented, the changes should be welcomed by UK residents with US LLC interests and by advisers dealing with cross-border structures.
Why US LLCs create UK tax problems
Currently, there is often a difference between the way the UK and the jurisdiction in which a reverse hybrid is established treat the entity for tax purposes. In the case of US LLCs, these are treated, subject to taxpayer election (which is not desirable from a US perspective), as transparent for US tax purposes. Members of the LLC, including those who are UK resident, will be subject to US tax on profits, income and gains arising to the LLC. In contrast, HMRC typically regards a US LLC as an opaque entity. Members of the LLC are only subject to UK taxation when the LLC makes a distribution to its members. At that point, a UK-resident individual member is subject to income tax on the distribution.
This ‘mismatch’ in tax treatment results in double tax relief not being available under the UK/US double tax treaty on what are, essentially, the same economic profits. In some cases, the combined effective tax rate can be as high as 75%.
What the government is proposing
To address this issue, the UK government is proposing to allow UK resident individual members of reverse hybrids such as US LLCs to treat their interest on a transparent basis for the purposes of UK income and capital gains tax. This would align the UK tax treatment of the entity’s profits, income and gains with that of the other relevant jurisdiction. Where there is an appropriate double tax treaty in place, as is the case with the US, this would reduce the effective tax rate to whichever tax rate is higher: the UK rate or the US rate.
Our view
Mercer & Hole have submitted a response to the consultation in which we have welcomed the proposed direction of reform. The current rules can lead to commercial and personal distortions, including clients deferring distributions or considering restructuring steps that would not otherwise be driven by commercial need. Transparent treatment should better align the UK tax position with the economic reality for affected members, reduce the risk of double taxation, and improve certainty. We have suggested that this treatment should apply by election rather than automatically, as automatic treatment could be disadvantageous in some cases, and encouraged the government to confirm the effective date and transitional framework at the earliest opportunity, given the interaction with US filing timelines and the need for affected taxpayers to make decisions with certainty. It seems likely that we will hear more from the government on the topic in the Budget on 28 October 2026.
What affected taxpayers should do now
Affected taxpayers should monitor developments closely and consider whether historic or planned LLC distributions may be impacted by the proposed changes. If you have any questions about how investing through a US LLC might affect you, don’t hesitate to get in touch with us or reach out to your usual Mercer & Hole contact.
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