Limited Liability Companies (“LLCs”) are one of the most popular vehicles for closely-held US businesses, with the U.S. treating them as fiscally transparent by default. HMRC takes a different view and generally treats them as opaque. For UK residents and particularly trust beneficiaries, the characterisation mismatch can produce double taxation issues, so early planning is essential.

As explained in our article (US Limited Liability Companies (LLC)s and UK Residents (Part 1): Tax Considerations and the Anson Case) there is a fundamental mismatch in the treatment of LLCs between the IRS and HMRC, the respective US and UK tax authorities.

In brief, the IRS treats LLCs as fiscally transparent entities. Profits and losses are allocated to the members and reported on Schedule K-1, and the members pay federal (and in most cases state) income tax on those allocations as they arise, regardless of whether any distributions are actually made.

Conversely, HMRC’s default position is to treat US LLCs as opaque for UK tax purposes, similarly to a Limited company. The profits belong to the LLC and are taxed in the hands of UK resident members only when distributed, broadly as dividend income. There are exceptions to this in very specific circumstances, following the decision in Anson Case, but this is rare and HMRC has since reiterated its stance that LLCs will, for the most part, be treated as opaque entities.

The mismatch: how double taxation arises

The interaction between the US and UK regimes creates two distinct problems:

1. The timing of income. The US taxes the member or shareholder on allocations of profit as they arise, while the UK taxes at the point of distribution. Where profits are retained within the LLC, the US may have an earlier taxing point than in the UK.

2. The character of income, which can be the more material problem. For double tax relief to be available, the United Kingdom tax must be "computed by reference to the same profits, income, or chargeable gains" as the US tax. HMRC takes the view that allocations of profit at member level (taxed in the United States) and distributions from the entity (taxed in the United Kingdom) are not the same income. Accordingly, the US tax is generally not available as a credit against the UK liability on the distribution.

Interest in possession trusts: where the mismatch becomes acute

The presence of an interest in possession trust with a UK resident life tenant can create further divergence between the UK and the US tax treatment.

Firstly, there can be differences in who the burden of tax falls on between the UK and the US. In the US, the LLC's allocated profits are taxed in the hands of the LLC's member as they arise, being the trustees, settlor, or beneficiary (dependent on the US classification of the trust, with potential further complications for foreign trusts with US beneficiaries). By contrast, in the UK, the income arising from a distribution by the LLC, usually characterised as a dividend, flows through the trust to the life tenant when physically paid, who is taxed on the income at the time it is paid to the trustees. The taxpayer in each jurisdiction can therefore be a different person, meaning double tax relief will usually not be available.

The second concern is the character of the income in each jurisdiction, as described above. The life tenant is taxed on the income received by the trustees as though it were a dividend, while in the US, either the trustees, settlor, or beneficiary are taxed on profits as they arise. Due to deferring nature of the income between the two jurisdictions, double tax relief will again usually not be available.

The above issues were further amplified by the abolition of the remittance basis from 6 April 2025 and the introduction of the Foreign Income and Gains (FIG) regime. Before that date, non-UK domiciled beneficiaries could, in many cases, shelter foreign-source income from UK tax via the remittance basis, mitigating the mismatch in practice. From 6 April 2025, the new four-year FIG regime under Schedule 9 to the Finance Act 2025 provides only limited relief, and only to those who qualify on the basis of recent non-residence. Outside that window, UK resident life tenants will face the LLC mismatch on an arising basis.

A practical illustration

To illustrate, consider yourself a UK resident additional rate taxpayer who is the life tenant of a US resident IIP trust. The trust holds a 100% membership interest in a US LLC, which generates £450,000 of trading profits in the year (after converting to GBP). The LLC is treated as a disregarded entity for US tax purposes, and the trustees, as members, are taxed in the United States at the maximum trust rate on the allocated profits. [MS1] [DI2] The trustees pay the resulting US tax of, say, £166,500, leaving a net balance of £283,500 which would be due to you as the life tenant.

You are then subject to income tax in the UK as a UK resident, but only when profits are paid to the LLC members. Say the profits of £450,000 are paid in the subsequent year, you will be subject to UK income tax at the additional dividend rate of 39.35%, giving tax of £177,075.

The tax liability has arisen in separate tax years, has been incurred by different persons, and has been charged on different sources or characterisations of income. On that basis, a foreign tax credit will usually not be available. In this simplified example, total tax would be £343,575 on £450,000 of LLC profits, giving an effective tax rate of approximately 76.35%.

Looking ahead: potential UK reform

As shown, the existing UK approach to classification of LLCs is a source of significant friction for US-connected families and businesses moving to the United Kingdom, with the abolition of the remittance basis from 6 April 2025 placing the issue further back into the spotlight.

In an attempt to resolve some of the issues and keep the UK attractive for individuals who have interests in LLCs, either directly or indirectly, HMRC has opened a consultation on potential reform to treat such entities as transparent for UK tax purposes.

While making these entities transparent for UK tax purposes may prevent double taxation from arising, it remains to be seen whether this will resolve the issue for life tenants of trusts where it is the trustees that are members of the LLC.

Firstly, the US may still tax the profits as arising to the settlor or the trustees, whilst the UK will treat the life tenant as having the income arise to them directly. This means there may still be a mismatch between the person liable to tax.

In addition, as profits may be taxed as they arise it could lead to a dry tax charge. If the LLC realises profits without distributing the profits, then the life tenant may have a significant UK income tax liability without having received funds to pay it. The practical reality is that these issues rarely sit neatly within a single jurisdiction. A structure that appears efficient from a US perspective may create unexpected UK tax costs once trust and beneficiary rules are considered. Increasingly, successful planning requires simultaneous analysis of the entity, the trust, and the individual across both tax systems. This is an area where an integrated US/UK advisory approach can be particularly valuable, allowing potential mismatches to be identified before they crystallise into irrecoverable double taxation.

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Waiting until the time of tax reporting or filing is not recommended. Planning ahead, and in real time, is essential, as it may be possible to mitigate some or all of these issues and prevent double taxation.

If you are affected by the issues discussed in this article, please fill out the form below and one of our experts will be in touch to discuss your requirements and how we can help.