Double Trouble No More? The UK Moves to End 75% Tax Bills for UK Investors in US LLCs

UK resident individuals who invest through US LLCs can suffer both UK and US tax on distributions paid to them from the LLC, with effective rates that can exceed 75%. Following its summer consultation, the UK Government has now confirmed a new foreign tax credit to tackle the problem, with claims expected to be possible from early 2028.

The problem in brief

US limited liability companies (LLCs) are among the most popular business and investment vehicles in the United States. They are usually taxed as transparent there, so members pay US tax on their share of the profits as they arise. HMRC, by contrast, has long treated most US LLCs as opaque, meaning UK resident members are taxed only when profits are distributed, at dividend rates.

Because the UK and US tax regimes tax LLC members on their LLC income in these different ways, the UK/US Double Taxation Convention (the Treaty) and the UK’s domestic tax credit provisions do not generally give tax relief to UK individuals in respect of the US tax they have paid (in contrast to UK corporate members who are taxed differently). As a consequence, individuals may end up being taxed twice on the same profits - at full personal income tax rates. The Government has acknowledged effective rates potentially as high as 75%, while respondents to its consultation reported rates commonly in the 55% to 75% range, with some above 80% once US state and local taxes are included.

The Supreme Court's 2015 decision in Anson has added to the uncertainty. There, an LLC member was found to be taxable in the UK on his LLC income on a transparent basis in light of the particular terms of the LLC Agreement and so was entitled to Treaty relief.  Yet since the Anson decision HMRC has continued to treat most LLCs as opaque, leaving many taxpayers caught between the two positions.

Respondents told the Government that the issue has influenced decisions for individuals not to move to the UK, to limit time spent here, or for LLCs to locate staff and operations elsewhere. Those from a private capital background also described difficulties recruiting UK managers and executives where equity and profit-share arrangements sit within LLCs.

What has changed: credit, not transparency

In June 2026, HMRC consulted on reform. Its lead proposal was to treat eligible entities as transparent for UK resident individual members, so that they would be taxed on their share of profits as they arise, matching the US position and allowing a credit for US tax.

Having considered 64 written responses, the Government has changed course. In its response published alongside the Budget on 28 October 2026, it confirmed that it will instead introduce a new domestic foreign tax credit mechanism. The Government concluded that transparency would require significant new technical architecture, would be complex to integrate with the wider tax system, and could be unworkable in practice for minority and indirect investors, particularly in relation to capital gains. It also noted that transparency would have required exclusions that could deny relief to many working founders, entrepreneurs and family businesses.

The Government considers that a credit-based approach can provide a fair outcome for all types of investors, use information that investors already have, and be targeted precisely at cases of double taxation.

How the new credit is expected to work

Based on the Government response, the key features of the proposed regime are as follows:

• Specified entities: legislation will list eligible entities. These are expected to include US LLCs, US S-Corps, Jersey LLCs and French SCIs.
• Opaque treatment confirmed: these entities will be treated as opaque for UK tax purposes of individual members, so distributions (i.e., payments from the specified entity) will continue to be taxed as distributions at dividend rates of income tax.
• Elective credit: individual members will be able to elect to receive a credit for eligible foreign taxes they have paid personally on the specified entity’s profits, income and gains. The election reflects the preference of around two-thirds of respondents for an elective rather than automatic regime.
• Federal, state and local taxes: US federal, state and local taxes will all be eligible for credit against UK taxes.
• Average rate, not tracing: the credit will be calculated by reference to the average rate of foreign tax payable by the investor, using mechanical rules rather than tracing particular profits to particular distributions.
• Individuals only: the reforms are aimed at individual members. The Government has not indicated any change for corporate members.

The Government’s stated intention is for the relief to reduce an investor's effective tax rate to a reasonable level, often broadly comparable to investing in a business through a UK limited company.

When will it happen?

The timetable set out so far is:

• Technical consultation: the Government will publish a further technical consultation on the detail of the credit mechanism shortly.
• Legislation: the Budget document indicates that legislation will be included in Finance Bill 2027-28.
• Claims from early 2028: the Government has confirmed that claims for the new credit will be possible from early 2028.

This is a relatively quick timetable for a new relief and reflects respondents' emphasis on resolving the issue as soon as possible. However, the details are still to be settled, and the final rules may differ from the outline above.

Questions still to be answered

The technical consultation is expected to address several important points, including:

• Mixed income: how to calculate the effective foreign tax rate where an entity has a range of income and gains.
• Timing mismatches: how to deal with foreign tax arising when profits are earned, while UK tax arises only when profits are later distributed.
• Rate differences: how to provide a fair result given the difference between dividend and other income tax rates, including devolved rates.