HMRC Publishes Consultation on Reform of Taxation of US LLCs

HMRC’s consultation in June 2026 proposes amending the treatment of U.S. LLCs and other reverse hybrid entities for individuals who are resident in the UK, by recognising them as transparent for UK income tax and capital gains tax purposes. This initiative aims to resolve longstanding discrepancies between US and UK tax treatments, which currently result in exceptionally high effective tax rates sometimes exceeding 75% due to individuals being taxed on underlying US profits and subsequently subject to UK tax on distributions. HMRC also notes ongoing uncertainties following the Anson case, which conflicted with its published guidance that LLCs are generally considered opaque entities.

Under the proposed approach, individuals would be taxed on the underlying profits and gains of the LLC, with distributions no longer subject to UK income tax. This would enable appropriate double taxation relief, as the tax liability would be aligned with the underlying profits. For UK purposes, the activities of the LLC would be treated similarly to a partnership. The new regime might apply automatically; however, HMRC is also considering the possibility of an irrevocable election. It should be noted that these rules would not apply where the entity is UK-resident or trading through a UK permanent establishment. Consequently, certain structures particularly US LLCs controlled from the UK may continue to face high effective tax rates.

The consultation confirms that corporate entities will not benefit from equivalent transparency treatment, leaving unresolved issues related to financing, group tracing, and share capital testing. Additionally, mixed-member LLCs could become complex, with individuals potentially treating such entities as transparent, while corporations regard them as opaque. The consultation period remains open until 31 July 2026, with no indication at this stage as to when any new regime might come into force.