US LLCs and UK Tax: Why the Government’s New Credit May Not Be the Simpler Fix

A US LLC is taxed in the US on a look-through basis. The members pay US tax on the profits as they arise, whether or not any cash is paid out. The UK has long treated most LLCs as companies in their own right. On that view, a UK-resident member is taxed only when money is paid out, as a dividend.

The result is two tax bills on the same profit, one in each country, and the UK/US treaty gives no relief because each country is taxing something different. The government’s consultation accepted that combined rates can pass 75%. Some respondents reported rates above 80%.

The government has now decided on a credit. In outline:

• The UK will list the entities covered: US LLCs, US S corporations, Jersey LLCs, and French sociétés civiles immobilières. The list is as currently proposed and may be amended before legislation.
• For a UK-resident individual, these will be treated as companies, so payouts are taxed as dividends.
• The member can then choose to claim a credit for the foreign tax they have personally paid on the entity’s profits.
• The credit is based on the average rate of foreign tax the member pays, not traced to each individual payout.
• Claims open from early 2028. For earlier years and open disputes, the government says only that it is considering options.

The government’s aim is a combined rate broadly comparable to trading through a UK company. For an additional rate taxpayer, that is approximately 54.5% on an illustrative basis. Matching transparency would have produced approximately 45% on trading profit, also illustratively. The response does not say whether the credit is intended to leave tax of that size, and the answer to that question determines how much the reform is actually worth.

The government’s main reason for preferring a credit is simplicity. It says transparency – meaning the UK would also look through the LLC to its members – needs a lot of new rules, while a credit does not.

That argument assumes LLCs are companies for UK purposes. For many LLCs, that is open to challenge. In the Supreme Court case of Anson v HMRC, a member of a Delaware LLC was held to be taxable on his share of the profits as they arose, which is the look-through approach. HMRC says the case turned on its own facts and still treats almost all LLCs as companies. But the features the Court relied on are common. Most US LLCs taxed as partnerships have operating agreements that allocate profits to each member as they arise. For those, the transparent answer is often the right one, and the STEP consultation response notes that some practitioners have already agreed transparent treatment with HMRC on this basis.

The simplicity comparison is therefore circular. Against a starting point where every LLC is a company, a credit looks simple. But the starting point is not settled. The government’s plan would also write company treatment into statute for the listed entities, which settles the question in HMRC’s favour for them and does nothing for the rest.

A credit is not simple to run, either. A member still needs their US tax figures for every year. The government has left open how to handle the timing gap, US tax is paid as profits arise, UK tax when money is paid out, perhaps years later, how to treat different kinds of income, and how dividend rates compare with other applicable rates. Under transparency, both countries tax the same profit in the same year, so most of those problems do not arise.

Treating every payout as a dividend can also produce unexpected results. Suppose an LLC sells an asset and the member pays US tax of 23.8% on the gain. If the credit is capped at the UK tax on the payout, the combined rate would be 39.35%, the dividend rate. Under transparency the UK would charge capital gains tax at 24%, and the combined rate would be approximately 24%. On trading profit it runs the other way: 39.35% as a dividend against 45% as trading income. These figures are illustrative, but the point is that a dividend-based credit changes the result according to the type of income, and not always in the taxpayer’s favour.

The response also does not say whether the credit will apply against capital gains tax when an LLC interest is sold, or how it will work for US citizens and green card holders, where the treaty’s coordination rules may limit it. These are significant gaps.

The government’s best argument concerns smaller investors. Someone with a minority stake may have only a US tax statement, a Schedule K-1,and no access to the LLC’s records. Turning that into a full UK calculation can be impractical, particularly for capital gains. A credit asks much less of them, and that is a genuine advantage.

The government is also right that the consultation’s proposed exclusions, for entities run from the UK, would have shut out many working founders. But those exclusions were a design choice, not an inherent feature of transparency. Respondents, including STEP, suggested alternatives, such as taxing only the UK-based portion of the profits, which would have addressed the concern without excluding founders entirely.

The real weakness in the government’s position is the either-or choice. Most respondents preferred transparency, and several suggested offering it where the information exists, with a credit as the default or fallback for those who cannot support a full transparent calculation. That approach would have helped members of simple LLCs and those with a strong Anson position, while the credit protected smaller investors with limited access to records. The response explains why transparency alone is too hard. It does not explain why a combined approach would not work.

Expect no relief yet. Payouts in 2026-27 and 2027-28 are taxed under today’s rules. The response says claims open from early 2028 but does not confirm which years they will cover. Many, though not all, operating agreements also require payouts to cover the members’ US tax liability, which limits how far distributions can be deferred in practice.

Keep any current transparent filing position. If a client already reports an LLC on an Anson basis, they should hold that position and keep their analysis current, including the operating agreement and any correspondence with HMRC. The response does not say whether company treatment in the new law will override an existing transparent position, or whether claiming the credit would be treated as an admission that earlier returns were wrong. Both questions need to be resolved in the technical consultation.

Do not put open enquiries on hold. For earlier years the government is only considering options, and the time limits for amending returns keep running. We would not pause a live dispute in the hope of a legislative fix that has not yet been designed.

Gather the records now. The credit depends on US tax the member has paid personally, so clients should keep their K-1s, US federal and state returns, and proof of payment for each year. It is not yet clear whether tax paid by the LLC on a member’s behalf, such as some US state composite taxes, will count towards the credit.

Newcomers and movers should plan around the timing. Qualifying newcomers get four years of relief on foreign income and gains under the foreign income and gains (FIG) regime, so the sharp rise in UK tax comes in year five. For the earliest arrivals under the new regime, that is around April 2029, after claims open, so the credit belongs in their planning from the outset. An LLC run from the UK may count as a UK company for tax purposes, which brings corporation tax into play and can remove FIG relief entirely. Nothing in the consultation response changes that analysis.

US citizens and green card holders need a separate review. Treaty rules may limit the credit the UK gives in these cases, and we would not assume relief is available until the detail is published.

The technical consultation is the opportunity to shape the detail before it goes into a Finance Bill. As contributors to the STEP consultation response, priorities for the next round are:

• Keep a route to transparency for members who can support it, with the credit as the default for those who cannot.
• Clear rules on timing, so that US tax paid in one year can be matched to UK-taxable payouts in later years.
• A credit against capital gains tax as well as income tax, and capital treatment for gains realised inside the LLC on a disposal of the underlying assets.
• A clear list of which foreign taxes qualify, including state taxes paid by the LLC on a member’s behalf.
• Relief for earlier years, a settlement route for open enquiries, and confirmation that claiming the credit is not an admission that earlier transparent returns were wrong.
• Workable rules for US citizens, green card holders, and investors in layered structures where the LLC sits within a wider holding arrangement.

The consultation response is a step forward in acknowledging the problem. The credit mechanism, as currently described, leaves too many questions open to give clients certainty. We will be pressing for answers on all of the above.