UK and International Tax news

HMRC Consults on Tax Treatment of US LLCs and Other Reverse Hybrids

Friday 19th June 2026

HMRC has issued a consultation document on the tax treatment of UK resident members of US LLCs and other ‘reverse hybrids’.

It has been HMRC’s general practice to tax a UK resident member of an LLC on the profits of the LLC only if and when those profits are distributed by the LLC to its members. In particular, it has treated a Delaware LLC as having ‘ordinary share capital’ for the purposes of s.832 TA88.  Any tax paid in the US on the profits of the LLC is available for relief against UK tax only as underlying tax and only to a UK company which controls, directly or indirectly, at least 10% of the voting power in the LLC.  However, double taxation can arise for UK resident individual members of an LLC if treated as transparent in the US but opaque in the UK.

HMRC’s practice remains at variance to the 2015 Supreme Court decision in the Anson case [UKSC44] which found that the US LLC should be treated as transparent for UK tax purposes and that profits were taxable on the UK members as they arose rather than when they were distributed, and the taxpayers appeal was allowed.

HMRC maintained that the decision was specific to the facts found in that case. Where US LLCs have been treated as companies within a group structure, HMRC would continue to treat US LLCs as companies.  Where a US LLC has been treated as carrying on a trade or business, i.e. transparent for tax purposes, HMRC would continue to treat the US LLC as carrying on a trade or business.

Given the different views on the opacity of LLCs, individual members of an LLC who are tax resident in the UK can face a high effective tax rate, potentially as high as 75%. They will be chargeable directly on profits, income and gains as these arise in the US, and taxable again in the UK on any distributions of the LLC’s pre-tax profits. These tax charges arise because the provisions of the UK/USA DTA on double taxation relief.

The government now appear to recognise the issue of high effective tax rates for UK resident individual members of reverse hybrids and wishes to find a solution which is “effective and robust in providing a fair outcome with long-term certainty”.

The government says it is mindful of the need to avoid unnecessary disruption to the established tax position for corporate members of hybrids. The consultation does not represent an intention to change the position for corporates.

The consultation asks a range of questions on solutions proposed, whether there are problems with the proposed solutions, what are the implications for different types of investors, with details of technical implementation such as timeframes and practical scope.

The consultation asks for views on proposals for changes to legislation by 31 July 2026.

 

If you would like more detail on this consultation, please contact Keith Rushen on +44 (0)20 7486 2378.

Contact Us