2. Capital distributions
The UK taxes capital and income distributions from companies at different rates. Capital distributions are subject to UK tax at a 10% or 20% after the application of a tax-free annual exemption of £12,300. Income distributions by contrast are subject to tax rates of up to 39.35%. Accordingly, if the distributions from Lyle’s LLC are capital, this could reduce the UK tax cost.
If the LLC were to be liquidated, the distributions to Lyle would be capital. The UK tax on the distribution would be substantially reduced (in the above example, he would be subject to 20% rather than 39.35% UK tax on the distribution), thereby substantially reducing Lyle’s global tax bill. Review and advice is needed in a liquidation process to align the UK and US position, and consideration of Lyle’s personal circumstances would also be needed.
Lyle would also be subject to a capital gain is he were able to sell his interest in the LLC. The US position would be for the LLC to dispose of the underlying US real estate as part of the liquidation event, so that the same economic gain is subject to tax in the US and UK. Under the US/UK tax treaty there’s potential for double tax relief to be available on the UK tax return where the underlying asset being disposed of is US real estate. Long-term gains are currently subject to a Federal income tax rate of 20%, however, you may need to factor in Net Investment Income Tax (NIIT) at 3.8% and potentially State tax.