HMRC Opens Consultation on Reform of the UK Tax Treatment of US Limited Liability Companies (LLCs)

On 10 June 2026, HMRC published a consultation on the taxation of UK-resident individuals who are members of US limited liability companies (LLCs) and other reverse hybrid entities. The consultation acknowledges a long-standing problem that many advisers, taxpayers and representative bodies have been raising for years, namely that the interaction between UK and US entity classification rules can produce economically double-taxed outcomes which are difficult to reconcile with the policy objectives of the US/UK tax treaty.

The Long-Standing LLC Classification Problem

This is not an uncommon problem for those advising internationally mobile individuals with US connections. The United States generally treats LLCs as fiscally transparent entities, with income taxed directly on the members as it arises. The UK frequently reaches a different conclusion, treating the same LLC as a company for UK tax purposes. The consequence is that US tax can arise when profits are earned, whilst UK tax may arise later (for the owners) when profits are distributed. In many cases, foreign tax credit relief is unavailable in the US because the UK and US are regarded as taxing different items of income at different points in time, resulting in effective tax rates that can significantly exceed the marginal rates in either jurisdiction individually.

Why the Issue Has Become More Significant

The consultation also arrives against a backdrop of substantial change affecting internationally mobile individuals. Prior to 6 April 2025, non-UK domiciled individuals could claim the remittance basis of taxation, under which foreign income and gains were only subject to UK tax if remitted to or enjoyed in the UK. For many US citizens holding LLC interests, this meant that undistributed LLC profits sitting offshore could often be managed without triggering an immediate UK tax charge. The abolition of the remittance basis from 6 April 2025 and its replacement with the Foreign Income and Gains regime, under which all UK residents are now taxable on worldwide income and gains on an arising basis, subject to a four-year exemption for qualifying new residents, restricts that flexibility for those who had exhausted or never qualified for the new regime. The classification mismatch problem has therefore become considerably more prominent for a larger group of taxpayers.

At the same time, the Government has extended the inheritance tax net to capture many long-term UK residents who would previously have fallen outside it, and confirmed that most unused pension funds and lump-sum death benefits will be brought within the scope of UK inheritance tax from 6 April 2027. This latter measure represents a fundamental change to UK retirement and estate planning, bringing to an end the long-established position under which unspent defined contribution pension pots fell outside the taxable estate entirely. Viewed alongside the abolition of the remittance basis, these measures have prompted genuine concern about the UK’s attractiveness to internationally mobile capital and internationally connected families. The LLC consultation may be seen as an acknowledgement that the cumulative effect of recent policy changes risks discouraging inward investment and relocation at precisely the moment when the government needs to demonstrate the opposite.

HMRC Acknowledges a Structural Problem

The consultation is particularly noteworthy because HMRC expressly accepts that high effective tax rates can arise because of classification mismatches between jurisdictions. Historically, advisers have often found themselves debating whether relief could be secured through treaty interpretation, foreign tax credit provisions or detailed analysis of the underlying legal rights attaching to particular LLC interests. The consultation instead approaches the issue as a structural problem requiring legislative consideration.

The Legacy of Anson v HMRC

The background to the issue is well known. In Anson v HMRC, the UK Supreme Court concluded that the taxpayer was entitled to credit for US tax paid on profits arising through a Delaware LLC. However, HMRC subsequently maintained that the decision turned on specific findings regarding Delaware law and the relevant LLC agreement, rather than establishing a broader principle applicable to all LLCs. HMRC’s International Manual continues to adopt a restrictive interpretation of the decision, resulting in ongoing uncertainty and frequent disputes regarding the availability of double tax relief.

What Reforms Are Being Considered?

The consultation does not yet contain draft legislation. Instead, it seeks evidence regarding the scale of the problem and explores potential legislative solutions. The Government has accepted that a problem exists, but it has not yet committed to a particular outcome. There remains a wide spectrum of possible reforms, ranging from targeted foreign tax credit relief mechanisms through to more fundamental changes in the treatment of reverse hybrid entities.

Transition Issues and Practical Implications

One aspect of the preferred approach that merits particular attention is the proposal that matching transparent treatment would apply automatically to eligible individual members, rather than by election. This is a deliberate design choice, but it has significant practical implications. Taxpayers who have structured their affairs around the existing opaque treatment, including those holding interests in LLCs elected to be classified as corporations or entities whose operating agreements more closely resemble a corporate structure, will need to carefully consider how the transition from opaque to transparent treatment would affect their position. The consultation raises transition questions but does not yet resolve them, and this is an area where adviser input during the consultation period will be especially valuable.

What Could This Mean for US Citizens Living in the UK?

For US citizens living in the UK, the consultation is potentially significant. Many hold interests in LLCs through family businesses, private investment vehicles, real estate structures, venture capital investments or historic US planning arrangements established before relocating to the UK. In some cases, taxpayers have deliberately avoided distributions because of concerns regarding UK tax treatment. Others have accepted significant economic double taxation as a cost of maintaining existing structures. Any reform that improves foreign tax credit alignment could materially alter future planning decisions.

Wider Implications Beyond LLCs

The consultation may also have wider implications beyond traditional LLC structures. HMRC has framed the exercise around reverse hybrids more broadly, raising the possibility that any resulting legislation could affect other internationally recognised entities where differences in classification create mismatches between jurisdictions.

What Happens Now?

At present, no immediate change in law has occurred. Existing filing positions, reporting obligations and foreign tax credit analyses remain unchanged. Advisers should therefore continue to apply current law whilst monitoring the consultation closely. Nevertheless, the publication itself is significant. It represents an acknowledgement from HMRC and HM Treasury that the current treatment of many US LLC structures is producing outcomes which may not align with broader policy objectives and which may warrant legislative intervention.

A Broader Pattern of Change in US/UK Taxation

For internationally mobile individuals, particularly US citizens and green card holders living in the UK, this consultation sits within a broader pattern of developments that have attracted increasing attention across the US/UK private client industry. Over the past eighteen months alone, advisers have been required to reassess long-established assumptions in areas including the abolition of the remittance basis, the introduction of the Foreign Income and Gains regime, the extension of UK inheritance tax exposure for long-term UK residents, the inclusion of most unused pension funds within the UK inheritance tax net from April 2027, and HMRC’s March 2025 change in published guidance concerning the UK taxation of certain US pension lump sums.

Related Developments in the United States

At the same time, a number of significant disputes and controversies continue to develop in the United States. The cases of Christensen v United States and Bruyea v United States, both decided by the US Court of Federal Claims and currently on appeal before the Federal Circuit, have raised an important question regarding whether treaty-based foreign tax credits can be applied to offset the 3.8% net investment income tax. Christensen arose in the context of the US-France income tax treaty, whilst Bruyea extended similar reasoning to the US-Canada treaty. The IRS has appealed both decisions and is unlikely to concede the point administratively, but the litigation represents a broader pattern of taxpayers and practitioners challenging areas where the interaction of domestic tax rules and treaty obligations produces outcomes that many regard as inconsistent with the underlying purpose of those treaties.

The Common Thread

Running through many of these developments is a common theme. Increasingly, the most significant issues affecting internationally mobile individuals are not arising from headline rate changes, but from differences in classification, timing, reporting obligations and the interaction between two tax systems that were never designed to operate seamlessly together. Questions concerning LLC classification, pension taxation, treaty interpretation, foreign tax credit relief, offshore reporting obligations, expatriation planning and inheritance tax exposure are all examples of areas where the technical position continues to evolve.

When Might Reform Happen?

Whether meaningful reform emerges from this consultation remains uncertain. The US experience with entity classification reform offers a useful, if imperfect, reference point. When the IRS published Notice 95-14 in March 1995, signalling its intention to simplify entity classification, practitioners welcomed the direction whilst accepting that implementation would take time. Proposed regulations followed in May 1996, with final regulations published in December 1996 and effective from January 1997. The entire process, from public notice to operative legislation, took under two years. That was, however, a regulatory change effected by Treasury and the IRS without the need for Congressional action. The UK equivalent will require primary legislation. The consultation closes at the end of July 2026, after which HMRC will need to analyse responses, publish a consultation response, and develop draft legislation suitable for further technical consultation before anything can be introduced into a Finance Bill. Given that no draft clauses exist at this stage and the transition questions alone raise considerable complexity, provisions taking effect before April 2028 would represent a notably swift outcome. Practitioners and their clients should plan on the basis that the current position is likely to remain in force for some time yet.

Conclusion

HMRC’s willingness to acknowledge that entity classification mismatches can generate unintended and potentially excessive tax outcomes is nonetheless notable. For practitioners advising US-connected individuals in the UK, it is a reminder that many of the most important developments at present are occurring not through major legislative announcements, but through a series of consultations, guidance changes, tribunal decisions, court challenges and administrative developments that collectively shape the direction of travel for US/UK private client taxation.

At USTAXFS, we continue to monitor these developments closely through our ongoing review of treaty interpretation, foreign tax credit mechanics, pension taxation, inheritance tax reform, expatriation planning, information reporting obligations and international mobility issues. The LLC consultation is therefore interesting not merely because of its potential impact on US LLCs, but because it may provide a broader indication of how policymakers are beginning to approach long-standing areas of difficulty within the US/UK tax relationship. For advisers and taxpayers alike, that may prove to be the more significant development.

Article by Glenn Snow