LawFlash

UK Government Consults on Tax Treatment for Individual Members of US LLCs

June 23, 2026

The UK government is consulting on new rules to address the double taxation affecting UK resident individual members of US limited liability companies (LLCs) and other reverse hybrids. If adopted, the reforms would remove a significant tax hurdle for multinational enterprises with UK-based personnel, as well as for globally mobile professionals and investors. The proposed reforms are part of the UK government’s push to attract and retain talent in the UK.

KEY TAKEAWAYS

Entities (such as most US LLCs) that are treated as tax “transparent” (i.e., “looked through” for tax purposes) in their home jurisdiction but “opaque” in the UK are referred to as “reverse hybrids”.
Currently, UK tax resident individuals who are members of reverse hybrids can face effective double taxation on their returns, as they are taxed in both the entity’s jurisdiction and the UK on the same economic profits, for which relief is not available under a double tax treaty. UK investors in US LLCs, for example, can face effective tax rates of up to 75%.
To address this longstanding issue, HM Revenue & Customs (HMRC) proposes treating reverse hybrid entities for UK tax resident individual members in the same way as the entity’s jurisdiction does. This should facilitate double taxation relief and avoid very high effective tax rates for UK tax resident investors.
Corporate members are excluded from the proposed changes, which is unsurprising as they typically do not suffer the same double tax issues as individuals. This avoids disrupting existing UK corporate structures, but corporate investors will still have to assess carefully the risks of economic double tax, particularly for smaller minority investments.
The UK government is seeking feedback on the technical implementation of the proposal, eligibility requirements, and alternative forms of relief (such as a credit or deduction system).
The consultation closes on 31 July 2026. A date for implementing any resulting legislation has not yet been announced.

US LLCS

As reverse hybrids, US LLCs have long posed challenges for UK tax residents due to the tax classification mismatch between the United Kingdom and United States.

For US federal income tax purposes, US LLCs are generally treated as tax transparent entities unless they elect to be treated as corporations (known as making a “check the box” election). This means members—including those in the UK—pay US taxes on their share of the US LLC’s profits as they arise, whether or not distributed.

The UK tax treatment of a US LLC depends on its constitutional documents, the relevant laws in its jurisdiction of incorporation, and the facts and circumstances. HMRC has historically classified by default most US LLCs as opaque for UK tax purposes. UK individuals who are members are therefore, in addition to the US taxes imposed, usually taxed in the UK on the receipt of distributions from US LLCs.

As a result, UK resident individuals are taxed on distributions at the dividend rate (currently up to 39.35%). Double taxation relief is usually not available for any US taxes charged on underlying profits (potentially at up to 37%), as the United Kingdom and United States do not calculate the tax by reference to the same income source. Consequently, when an LLC fully distributes its profits, the same underlying economic returns are taxed at marginal personal rates in both countries.

For UK resident corporate members, similar principles apply, but double taxation can often be mitigated (for example, through the corporation tax exemption for distributions or by claiming a credit for US withholding tax on distributions). However, some complications may remain, not least from the lack of clarity on the correct tax treatment in the UK of particular US LLCs following Anson v HMRC [2015] UKSC 44, in which the UK Supreme Court ruled that a Delaware LLC was, on the facts, transparent for UK income tax purposes.

PROPOSED REFORM

To address the high effective tax rates and persistent uncertainty facing individual UK members, the UK government has proposed to introduce legislation requiring UK tax resident individuals with interests in eligible reverse hybrids to treat their holdings as tax transparent for UK income and capital gains tax purposes.

By aligning the UK tax treatment with that of the entity’s own jurisdiction, the proposal aims to increase certainty and facilitate double taxation relief. The intent is to limit the individuals’ overall tax burden to the higher of the domestic rates in each country.

Transparent UK tax treatment would apply automatically and prospectively for tax years following the introduction of the legislation.

COMMENT

The proposals mark a meaningful step towards resolving longstanding double taxation issues for UK tax resident individuals participating in US LLCs and other reverse hybrids.

The changes should reduce cross-border tax mismatches for UK investors. They are also expected to simplify tax structuring and compliance for many multinational enterprises, including US-parented businesses using LLCs within corporate structures and share-based incentive schemes.

However, the changes may also give rise to other complexities. For example, it remains to be seen how the new rules would address individual members’ transitions from opaque to transparent treatment for their reverse hybrid holdings, or vice versa if the holding ceases to be eligible for any reason. The proposed legislation will also need to contemplate what should happen if the entity’s jurisdiction changes tax classifications under domestic law.

While the proposals address the issues surrounding the income tax treatment of reverse hybrids for UK resident individual members, they do not address any of the other issues we often encounter with US LLCs, such as their inability to form part of a corporate group for UK tax purposes.

Affected businesses may wish to review their current group structures to assess the potential impact of these proposed reforms on their UK tax resident stakeholders.