LLC beware! The UK tax trap for American LLCs and how to avoid it

In the 12 months leading up to March 2025, more Americans applied for British citizenship or indefinite leave to remain than in any other period since records began. Naturally, many of those individuals will be moving to the UK with their existing asset holding structures, and one of the most common vehicles used in US structures is the Limited Liability Company (LLC). 

Sadly, US LLCs can cause real difficulties from a tax perspective when held by individuals or structures that are UK resident or have UK assets. This briefing note explains when issues can arise and how they might be resolved.

What’s the problem?

Many US LLCs are treated as “transparent” for US tax purposes. This is because members of US LLCs often choose to “check the box” for federal tax purposes to attribute any income and gains of the LLC to the members directly, as if the member received the income and gains directly. The consequence is that the LLC does not pay any tax on income and gains from its investments and activities; its members do instead.

The UK, like many countries, has various legal vehicles which are similarly “transparent” for tax purposes. One example would be an English partnership. However, the tax treatment of such legal entities in the UK is based on their legal characteristics; it is not something done electively by “checking the box”.

It is for this reason that US LLCs can be particularly challenging for UK taxpayers. In many cases, their legal characteristics can more closely resemble a company than a partnership when viewed through an English legal lens (one might say the clue is in the name: limited liability company).

As a result, the UK tax system often regards LLCs as taxable entities in their own right (or tax “opaque”), regardless of whether they have been elected otherwise for US tax purposes. This can create a mismatch between how the LLC is treated in the US, as tax “transparent”, versus how it is treated in the UK, as tax “opaque”.

What does this mean in practice?

Where a mismatch such as this exists, it can create unhelpful and potentially disproportionate tax outcomes. Take, for example, a US LLC that is managed by an individual who has moved to the UK. The LLC could well become UK tax resident by virtue of being managed from the UK by its member, in which case its profits could be subject to both UK and US taxes.

Ordinarily, the UK’s wide network of double tax treaties can relieve any such double tax on the same profits that may otherwise arise. However, for relief to be available on this basis, it is generally accepted, following the Supreme Court case of Anson, that the same person must be taxed on the profits in both countries. For LLCs with the characteristics described above, this will not be the case, seeing as the LLC itself may be taxable in the UK, whereas the member would be taxable in the US.

The unhappy result of this would be an effective tax rate on the LLC’s profits in excess of 60%, with compliance, payment and reporting obligations in both the US and the UK.

What can be done?

As is often the case with tax planning, the best time to address any issues that an LLC might present when moving to the UK is before the move.

For those in this fortunate position, it may be possible to restructure the LLC so that it has consistent tax treatment between the US and UK, so that the double taxation problem described above never arises. For example, it may be possible to change the terms of the LLC’s Operating Agreement so that it is regarded as “transparent” for UK tax purposes, just as in the US.

Alternatively, the LLC might be able to contribute its assets to a new vehicle that has the same tax profile in both countries (such as a US corporation, UK company, or a partnership). In either case, it will be crucial to get advice in both the US and the UK to ensure the restructuring itself does not trigger additional tax liabilities.

Those who have already become UK tax resident and who have active (ie profit-generating) LLCs may face more of a damage limitation exercise, rather than a total solution. Restructuring an LLC interest after an individual has become UK-resident risks triggering other adverse UK (and potentially US) tax consequences. Therefore, any planning to mitigate double taxation done from then on may generate tax liabilities, which need to be weighed up against the double tax risk LLCs pose.

How we can help

We have extensive experience advising clients from the US and globally in relation to their international structures. As an independent London law firm, we are well placed to streamline international planning for our clients, wherever they are based. Unconstrained by global offices or ties to a formal international network, our independence means we collaborate with the top advisers in the USA and globally to put the interests of our clients first.

For further information, please contact James Bromley, Katjana Cleasby or your usual contact at Farrer & Co.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, May 2025