For US individuals moving to the UK, LLCs have long been top of the “pitfalls” list when considering the pros and cons of moving here. For some, the double tax hit on LLC profits has been enough to deter them from relocating to the UK and the government are keen to resolve this.
In July 2026, in a bid to bring more Americans to the UK, the government announced a consultation to reform the taxation of UK resident members of US LLCs and other similar “reverse hybrids.” Today, the government have summarised the responses received from professional advisers (including Mercer & Hole) and set out how they intend to solve the double tax issue in a 30+ pages document. For more information, please see the GOV.UK summary of responses.
What is the issue affecting reverse hybrids?
An LLC is an example of a reverse hybrid which is an entity which is transparent in the jurisdiction of establishment (US) but opaque in another jurisdiction (e.g. UK). The mismatch in tax treatment prevents the double tax treaty from doing what it should which is to eliminate double tax arising on the same income and gains in two jurisdictions. As a result, UK resident LLCs members find themselves being taxed on distributions out of an LLC without any US foreign tax credit.
Government’s Budget Day response
Although the July consultation focussed largely on the proposed solution of the taxpayer making an election for the entity to be transparent for UK tax purposes, the response document confirms the government are “minded towards providing a new form of elective domestic credit relief for individual investors in reverse hybrids.”
In other words, the UK resident individual will be able to take an element of foreign tax credit on distributions received from the LLC. The document also confirms distributions will be subject to dividend rates (currently 10.75, 35.75%, 39.35%) which was assumed but clarity is welcomed. Federal, state, local-level taxes would be eligible for credit, and the credit would be calculated based on the average rate of foreign tax payable by the investor as opposed to by tracing. Often this is less favourable.
To prevent any uncertainty regarding which entities will qualify, legislation will be introduced to specify eligible entities that will be opaque for the purposes of allowing a credit. The entities specified would include US LLCs, US S-Corps, Jersey LLCs, and French SCIs.
Any exclusions from the relief?
The document very clearly states that only individuals will qualify for the relief. Trustees are therefore excluded. No adjustment is required for companies because a distribution from an LLC to a UK corporate is usually exempt.
When can taxpayers make a claim?
The document is vague on timings. It says claims for the new form of credit will be possible from early 2028. It is quite unusual for a new relief not to begin at the start of a UK tax year. Possibly they have opted for early 2028 to align with US calendar year 2028.
Given tax returns for 2026/27 are due 31 January 2028 we wonder (optimistically) whether relief would be available for the 2026/27 tax year. Going one step further, could this extend to 2025/26 tax returns which can be amended by 31 January 2028? Or does it mean distributions received early 2028 which could mean 2027/28 or 2028/29 onwards. We shall wait to hear.
What about previous years?
Again, the document is vague. It does say that it “understands the significance of prior periods and ongoing disputes for affected stakeholders and is considering practical options available to address these”. We shall wait to hear.
Next steps and planning points
The government will publish a further technical consultation on the proposed credit relief mechanism, before legislating in a future Finance Bill.
Overall, this is all moving in the right direction although there are still lots of questions unanswered. Where it is possible to delay distributions from an LLC to a later period it seems advisable to do so.
How we can help
Get in touch with us if you have any questions about the above. If you’d like to explore how these changes fit into your wider plans, we would be delighted to hear from you.
