UK Government confirms new tax credit solution for US LLC Investors

Earlier this year, we discussed the UK Government consultation to remove US LLC double taxation. The UK government has confirmed that it now intends to tackle the long-standing double taxation issues faced by UK-resident individuals investing through US Limited Liability Companies (LLCs) and other so-called “reverse hybrid” entities.

Following a consultation that attracted 64 responses from professional bodies, advisers, businesses and affected individuals, the government has concluded that a new tax credit solution for US LLC investors can offer the most practical and effective solution.

Background on the consultation

The consultation was launched in response to concerns that UK-resident investors in US LLCs and similar structures can face exceptionally high effective tax rates due to differences in how the UK and overseas jurisdictions classify these entities. In many cases, the foreign jurisdiction taxes the individual member on profits as they arise, while the UK taxes distributions received from the entity. Because existing double tax relief mechanisms often do not align with these differing approaches, investors can suffer significant levels of double taxation.

Evidence submitted to the consultation highlighted effective tax rates commonly ranging from 55% to 75%, with some respondents reporting rates above 80% and, in certain cases, exceeding 90%. US LLCs were the most frequently cited vehicles, although similar issues were also identified in relation to US S-Corporations, Jersey LLCs and French Sociétés Civiles Immobilières (SCIs).

Impact on Individuals and Businesses

Respondents were clear that the current rules can influence both personal and commercial decisions. Many reported that the tax treatment had discouraged internationally mobile individuals from relocating to the UK, accepting UK assignments or remaining UK tax resident. Others highlighted challenges for businesses seeking to attract executives and key employees where profit-sharing, carried interest or incentive arrangements are held through LLC structures.

The consultation also revealed concerns that the current regime may deter investment into sectors such as technology, scientific research, private equity, asset management, real estate and media businesses.

Why was transparency rejected?

The government’s original proposal explored the possibility of treating eligible reverse hybrids as transparent for UK tax purposes.

While many respondents agreed that this could, in principle, address the root cause of the mismatch, significant concerns were raised regarding complexity and practical implementation.

Particular concerns included:

• The need to recalculate income and gains under UK tax principles using underlying entity information.
• Difficulties for minority investors who may only receive limited tax reporting, such as a Schedule K-1.
• Complex capital gains tax consequences and challenges in applying existing UK rules to foreign entities.
• The likelihood that many working founders, entrepreneurs and owner-managed businesses would fall outside the scope of any transparency regime due to necessary exclusions relating to UK residence or permanent establishment concerns.

The government ultimately concluded that a transparency regime would require extensive new legislation, create substantial compliance burdens and integrate poorly with the wider UK tax system.

The new proposed solution

Instead, the government intends to introduce an elective domestic foreign tax credit mechanism.

Under the proposed framework, eligible entities would remain treated as opaque for UK tax purposes. UK-resident individual members would continue to be taxed on distributions received from the entity, with those distributions taxable at dividend income tax rates.

However, investors would be able to elect to claim a new form of credit for foreign taxes personally paid on the entity’s profits, income and gains.

The government’s initial proposal is that:

• US LLCs, US S-Corps, Jersey LLCs and French SCIs will be specifically included within the regime.
• Federal, state and local foreign taxes will be eligible for relief.
• Credits will be calculated using a mechanical average-rate approach rather than requiring detailed tracing of particular income streams.

The intention is to reduce effective tax rates to a level more comparable with investments made through conventional corporate structures while avoiding the complexity associated with full tax transparency.

What happens next?

A further technical consultation on the design of the new credit mechanism is expected shortly, with legislation to follow in a future Finance Bill.

Importantly, the government has indicated that claims should be available from early 2028.

The treatment of historic liabilities, ongoing HMRC enquiries and existing Anson-based filing positions remains under consideration, although no commitment to retrospective relief has yet been made.

Our view

This is a significant and welcome development for internationally mobile individuals and UK-resident investors with US interests. The government has clearly acknowledged that the existing rules can lead to unfairly high levels of double taxation and has opted for a solution that prioritises certainty and practical administration.

While further detail is required, particularly regarding historic periods and the operation of the credit calculation, the proposed regime represents an important step towards making the UK a more attractive location for internationally mobile entrepreneurs, executives and investors with cross-border business interests.