Potential Change to UK Tax Treatment of US LLCs

UK tax authority consults on changes to tax treatment of pass-through US LLCs and other non-UK "reverse hybrid" entities held by UK resident individuals

• Following an initial informal announcement by the Chancellor in April, HM Revenue & Customs has now launched a consultation on the UK tax treatment of US LLCs and other non-UK "reverse hybrid" entities (entities which are treated as tax transparent - such as a partnership, not a taxable person - in their home jurisdiction, but as tax opaque for UK tax purposes).
  
  
• HMRC is proposing that, from a future date, non-UK entities which are tax transparent for the purposes of their home tax regime should also automatically be treated as tax transparent for UK personal income and capital gains tax purposes (but not UK corporation tax purposes), whatever the current treatment under UK law. The intended impact on persons (including individuals) acting as trustees in certain circumstances (for example, as the trustee of a UK registered pension scheme) is currently unclear but presumably will be clarified.
  
  
• This change would most obviously affect the UK tax treatment of UK individuals' holdings in US LLCs, which are usually treated as tax opaque for UK tax purposes, but the proposed change could also affect the treatment of other non-UK reverse hybrid entities. It is not generally expected to alter the UK tax treatment of interests held in US LLCs that are "checked closed" to be treated as corporations for US federal tax purposes.
  
  
• The potential benefit of the reform would be to facilitate claims by UK resident individuals for relief for non-UK taxes suffered in relation to income and gains received through reverse hybrid entities, against their UK taxes. Currently, many UK residents with interests in US LLCs (for example) struggle to obtain UK tax credit for the US taxes they suffer on a pass-through basis, suffering double taxation on what is in essence the same economic return.
  
  
• However, as proposed, the reform could also have adverse effects on UK resident individuals with interests in reverse hybrids, particularly where the individual is benefitting from the "blocking" effect of the entity, shielding them from current inclusion for UK tax purposes of the entity's income and gains (with UK tax filing and payment obligations generally only arising when the relevant profits are distributed to them, significantly simplifying the associated UK tax compliance burden). The reform would result in reverse hybrid entities being pass-through also for UK tax purposes, such that they would no longer function as an effective "blocker" for UK tax.
  
  
• Changing the UK tax characterisation of a non-UK entity by statute according to its non-UK tax characterisation could also have adverse one-time tax effects by deeming a member's interest in an entity to be liquidated in a potentially taxable transaction for UK tax purposes (and also potentially in the reverse circumstances, where the assets of a transparent entity may be deemed to be contributed to a non-transparent entity in a taxable transaction where an entity's non-UK tax characterisation changes accordingly).
  
  
• The consultation does refer to alternative, less fundamental, approaches to reform, in particular the possibility of specifically providing for a deduction or credit for non-UK taxes suffered through a reverse hybrid without actually deeming it to be UK tax transparent for other purposes.
  
  
• The outcome of the consultation is uncertain, and we will be commenting and monitoring developments. Please feel free to contact any member of the London tax team to discuss the proposals if you are potentially affected.
  
  
• The consultation is open for comment until 31 July 2026 and is available here.

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