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Last updated: 22 Jun 2022
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Tax considerations of US Limited Liability Companies (LLCs) for UK residents

If you’re a US citizen who’s already UK resident or planning to move to the UK, you should be aware of the mismatch between the UK and the US when it comes to LLCs. In these case studies we show potential solutions for investors or business owners to mitigate the tax implications.

Her Majesty’s Revenue & Customs (HMRC) treats most US LLCs as corporations. In contrast, the IRS by default treats LLCs with more than one member as partnerships, or as a disregarded entity if it has one member. This mismatch in the characterisation of the LLC for UK and US tax purposes can lead to situations of double taxation, but this might be more accurately described as higher global taxation due to the different income characterisations. 

US-based LLCs may appear unsuitable for many UK residents from a tax perspective. However, there can be solutions for investors or business owners to mitigate the tax implications, which we highlight in the case studies below. These case studies are the most common situations that we come across, but you should seek professional advice before taking any action as your facts and circumstances may vary.

About the authors

Martin Scullion

+44 (0)20 7556 1207
scullionm@buzzacott.co.uk
LinkedIn

Liam McKeevor

+44 (0)20 7556 1244
mckeevorl@buzzacott.co.uk
LinkedIn

Her Majesty’s Revenue & Customs (HMRC) treats most US LLCs as corporations. In contrast, the IRS by default treats LLCs with more than one member as partnerships, or as a disregarded entity if it has one member. This mismatch in the characterisation of the LLC for UK and US tax purposes can lead to situations of double taxation, but this might be more accurately described as higher global taxation due to the different income characterisations. 

US-based LLCs may appear unsuitable for many UK residents from a tax perspective. However, there can be solutions for investors or business owners to mitigate the tax implications, which we highlight in the case studies below. These case studies are the most common situations that we come across, but you should seek professional advice before taking any action as your facts and circumstances may vary.

Case study 1

Case study 1 – UK resident and UK domiciled, with an interest in a US LLC

Lyle is UK resident and UK domiciled. He has an interest in a Californian LLC, which holds an underlying interest in some commercial property. Lyle understands that he needs to report his share of the profits annually on his US non-resident income tax return. However, as he is resident in the UK, he is unsure of the UK tax treatment.

For UK tax purposes, an LLC is an opaque entity whereas for US purposes it is transparent. The implication of this mismatch is that Lyle is personally subject to US tax on the profits of the LLC as they arise, whereas for UK purposes, he would only be subject to tax as payments are distributed by the LLC to him. A further implication of this mismatch is that there is no tax credit in the UK for US tax paid on the same profits. 

 

£

LLC profit

100,000

US tax on profit (assumed 37% Federal and 12.3% CA state tax)

(49,300)

Post tax profit distributed to Lyle

50,700

UK dividend tax (assumed rate of 39.35%)

(19,950)

Retained profit after US and UK tax

30,750

Total tax (US and UK)

69,250

Being an effective tax rate of

69.3%

There are two potential routes that may mitigate the tax implications that this mismatch in treatment creates.

The Anson case

1. The Anson Case

The mismatch in tax treatment between the UK and the US has been the subject of court proceedings in the UK in the case of Anson v HMRC for which a verdict was reached in the UK Supreme Court in 2015. The Anson case decided that Mr Anson was entitled to double tax relief on his share of the LLC's profits. If such treatment were applied to Lyle’s LLC, this would significantly lower the tax rate (49.3% rather than 69.3%).

 

£

£

LLC profit

 

100,000

US tax on profit

 

(49,300)

UK tax on profit (assumed rate of 45%)

45,000

 

Less: credit for US tax paid

(45,000)

 

UK tax due

 

-

Retained profit after US and UK tax

 

50,700

Total tax (US and UK)

 

50,700

Being an effective tax rate of

 

49.3%

Unfortunately, while the Anson case would be useful here, HMRC has taken the view that the Anson decision was fact specific. HMRC has therefore maintained its general position that a US LLC is still an opaque entity for UK tax purposes. HMRC will consider whether an LLC meets the Anson criteria on a case-by-case basis. Therefore, a legal opinion would be appropriate to support whether Lyle’s LLC could be considered akin to the LLC in Anson with the profits therefore eligible for treatment as a transparent entity for UK purposes.

Capital distributions

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. 

What should you do?

What should you do?

If you’re resident in the UK and looking to invest in a US LLC, or you're looking to structure your business in the US under an LLC, it’s quite possible that if long term growth is the aim, there could be some relief from higher taxation. Get in touch with our dual qualified UK/US tax experts upfront, to understand the risks.

Case study 2

Case study 2 – US citizen with LLC interest, becoming UK resident 

Jaime is a US citizen considering a move to the UK and is seeking pre-immigration UK/US tax advice. Jaime has a minor interest in a private equity fund structured through a New York LLC. 

Remittance basis claim

Remittance basis claim

On the basis that there could be a problem if Jaime was to receive distributions from the fund while UK resident, and has no say on whether the fund can distribute or accumulate profits, one solution could be for Jaime to claim the remittance basis of taxation.

The remittance basis of taxation is available to UK resident non-UK domiciliaries for the first seven tax years of UK residency (out of the previous nine). Thereafter, there is a remittance basis charge of £30k/£60k p/a for the privilege, and after 15 years (out of 20) of residence there is no ability to claim the remittance basis.

The advantage of claiming the remittance basis in a particular tax year is that foreign income in that tax year can’t be taxed in the UK, unless it is remitted to the UK. Therefore, this avoids the LLC distribution from being taxed in the UK, so avoids this additional tax charge on top of the US and New York tax on the LLC profits.

What should you do?

What should you do?

If you’re a US person coming to the UK with an LLC investment or business already in place, you should factor this into your pre-immigration planning. Get in touch with our dual qualified UK/US tax experts to establish whether making use of the remittance basis of taxation could be the solution for a certain number of years of UK residence.

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