US LLC UK Tax Treatment: Double Taxation After Anson

A US LLC is usually transparent to the IRS and usually opaque to HMRC. That mismatch means a UK-resident member can be taxed in the US on profits as they arise, taxed again in the UK on distribution, and denied foreign tax credit relief because the two charges fall on different income. The fix is structural.

Why the US LLC is the most misunderstood entity in cross-border planning

The limited liability company is the default vehicle for American business. It is cheap to form, flexible in governance, and — critically — fiscally transparent by default. A single-member LLC is disregarded entirely; a multi-member LLC is a partnership. Profits flow to the members, who report and pay tax whether or not a single dollar is distributed. For a US person, this is elegant: one layer of tax, no corporate return to speak of, full flexibility on allocations.

Transplant the same entity into the life of a UK resident and the elegance collapses. HMRC does not recognise the US federal classification. It applies its own analysis, looking at the entity's characteristics under the law of the state of formation: whether it has legal personality separate from its members, whether it issues something resembling share capital, whether the business is carried on by the entity or by the members, and — the decisive question — whether the members are entitled to the profits as they arise or only when the entity decides to distribute them.

Applying that analysis, HMRC's long-standing published view is that a US LLC is opaque. It is treated like a company. Its profits are its own. The UK member has no taxable income until a distribution is made, at which point the receipt is characterised as a foreign dividend.

Read those two paragraphs together and the problem announces itself. The IRS taxes Person A (the member) on Income X (a distributive share of profit) in Year 1. HMRC taxes Person A on Income Y (a dividend) in Year 3. Same economics. Different income, different year. Credit relief requires the same person to be taxed on the same income by both states. Break that identity and relief evaporates.

What is the Anson case and why does everyone cite it?

Mr Anson was a UK-resident, non-UK-domiciled member of a Delaware LLC, a US investment management business. He was taxed in the US on his share of the LLC's profits as they arose, at combined federal and state rates, and remitted the balance to the UK. He claimed credit for the US tax against his UK liability. HMRC refused, on the familiar ground that the LLC was opaque and the UK charge was on a dividend, not on the same income the US had taxed.

The litigation ran the full course. The First-tier Tribunal found as a fact that, under Delaware law and the terms of the LLC operating agreement, the members were entitled to their share of the profits as they arose — the profits belonged to the members automatically, not to the LLC subject to a later distribution decision. That finding was overturned on appeal and then restored by the Supreme Court in 2015, which held that Mr Anson was entitled to credit relief because the income taxed in the US was, in substance, the same income taxed in the UK.

Advisers celebrated. Then HMRC published its response, which was, in effect: fine — but that was a decision about that agreement, on that evidence, and we will continue to apply our existing treatment to US LLCs generally. Where a taxpayer's facts are genuinely the same as Anson's, HMRC indicated it would follow the decision. Where they are not, nothing changes.

The practical consequence is uncomfortable but clear. Anson is not a passport. It is a fact-specific precedent that shifts an evidential burden onto the taxpayer: you must show that your governing state law and your operating agreement confer a present, automatic entitlement to profits as they arise. Many operating agreements do the opposite. They make distributions subject to manager discretion, reserve amounts for working capital, permit the LLC to hold profits indefinitely — all commercially sensible drafting that quietly destroys the Anson argument.

The mismatch, side by side

Question	United States / IRS (default position)	United Kingdom / HMRC (default position)
How is the LLC classified?	Transparent — disregarded if single-member, partnership if multi-member, unless a contrary election is made	Opaque — treated as a company by reference to its characteristics under state law
Who is taxed on the profits?	The members, directly	The LLC itself is regarded as owning the profits; the member is taxed only on distributions
When does the tax point arise?	When profits arise, distributed or not	When cash is distributed
How is the receipt characterised?	Business or investment income retaining its underlying character	Foreign dividend income
Is credit relief available?	Generally yes for the member, against US tax on the same profits	Contested — the UK charge is on different income at a different time
What drives the classification?	An election on Form 8832, or the default rules	The substance of the entity and the operating agreement

How the double tax actually lands

Consider the shape of a typical case. A UK-resident founder holds a 40% membership interest in a Delaware LLC operating a US-facing consultancy. The LLC generates substantial profit. The IRS treats the founder as a partner, allocating a distributive share; US federal and state tax is paid on that share as it arises, either directly or via withholding on effectively connected income. The LLC retains most of the cash to fund growth and makes a modest distribution.

In the same year, the founder's UK return reports the modest distribution as a foreign dividend, taxed at UK dividend rates. Credit relief is claimed for the US tax paid. HMRC's position: the US tax was paid on profits of the LLC attributed to you under US law; the UK tax is on a dividend from an opaque entity; these are not the same income; relief is limited or denied.

Three years later the LLC distributes accumulated reserves. The founder pays UK dividend tax on the full amount — on profits that were already fully taxed in the US years earlier, with no US tax arising in the year of distribution to credit against it. The effective combined rate on the underlying economic profit can climb well beyond anything either system contemplates in isolation. And because the two charges sit in different tax years, even a sympathetic reading of relief rules struggles to reconcile them.

Layer in the situations that make it worse:

• State taxes. California, New York and others impose entity-level or member-level charges that HMRC is unlikely to credit against a dividend charge.
• Retained profits. The longer profits sit in the LLC, the wider the gap between the US tax year and the UK tax year — and the weaker any argument that the same income is being taxed twice in the same period.
• Loss years. A UK member sees no UK relief for a US-taxed loss allocation if the LLC is opaque, because the loss never reaches them.
• Exit. Selling a membership interest, or liquidating the LLC, produces yet another characterisation question — capital versus income, and in which jurisdiction first.
• Dual filers. A US citizen resident in the UK faces both systems personally, and the mismatch compounds with the ordering rules for credit relief. Our US-UK tax accountants see this combination most often among founders who moved to London after forming the entity.

Does the US-UK treaty solve it?

Less than you would hope. The treaty contains machinery for fiscally transparent entities, designed to ensure that income derived through such entities is treated as derived by a resident where that resident's home state taxes it accordingly. But the LLC problem is not principally a treaty-residence problem. It is a characterisation and timing problem inside domestic law. Where the UK says the taxable person is the member on a dividend in Year 3, and the US says the taxable person is the member on business profits in Year 1, the treaty's relief articles have limited purchase.

Mutual agreement procedure exists. It is a genuine route where the amounts justify it. It is also slow, resource-intensive and does not guarantee an outcome. For most private clients it is a fallback, not a plan. Sound cross-border tax planning treats treaty relief as a safety net, never as the design.

What are the realistic structural fixes?

The mismatch is not usually cured. It is avoided. Every workable solution does the same thing: force the two systems to agree on who owns the profit and when.

Elect corporate treatment for US purposes

A check-the-box election causes the LLC to be taxed as a corporation federally. The LLC pays US corporate tax; the UK member is taxed on distributions. HMRC already sees the entity as opaque, so the systems align: corporate tax below, dividend tax above, with a credit position that behaves conventionally. The cost is a genuine second layer of tax and potential withholding on distributions. Whether this beats the mismatch depends entirely on profit levels, reinvestment plans and exit horizon — it must be modelled, not assumed.

Use a US C corporation from the outset

For a UK resident building a US-facing business with reinvestment and a trade sale in mind, a C corporation is often simply the right answer. Both authorities agree it is a company. The analysis becomes ordinary: corporate tax, withholding on dividends, treaty rates, capital treatment on exit. Predictability has value.

Interpose a UK company

Holding the US interest through a UK company can convert an intractable personal credit relief problem into a corporate one, where different relief mechanisms and rates apply, and where extraction to the individual can be timed. This introduces its own complexity — controlled foreign company considerations, transfer pricing, US withholding — and is not a default.

Draft the operating agreement to fit Anson

Where the LLC form is commercially essential, it is possible to draft for a present entitlement to profits as they arise, mirroring the features the Supreme Court found decisive, and to document the state law position contemporaneously with a legal opinion. This is the highest-risk route. It depends on HMRC accepting your facts as materially identical to Anson's, and it constrains the commercial flexibility that made the LLC attractive in the first place. It should be adopted with eyes open and evidence assembled in advance.

Change the residence position rather than the entity

For internationally mobile clients, the timing of UK residence — and the interaction with the current rules for new arrivals — can matter more than the entity. Where a business sale or a large distribution is foreseeable, the question of when profits crystallise relative to UK residence deserves as much attention as the LLC itself. This sits squarely within high-net-worth planning rather than compliance.

What if the profits have already arisen?

Most clients arrive at this problem retrospectively, having filed on one basis or the other without articulating why. The remediation sequence matters.

• Establish the facts before the argument. Obtain the operating agreement, the state of formation, the capital accounts and the full distribution history. The classification analysis is evidential.
• Reconstruct the US position. Confirm what was actually taxed in the US, in which years, at what rates, and by whom — federal, state, entity-level and member-level.
• Quantify the exposure honestly. Model the outcome with and without credit relief across every open year. The number determines whether an Anson-style claim is worth making.
• Regularise the compliance. Missing US information returns for foreign-owned entities, and missing UK reporting of distributions, carry penalties that are mechanical and often exceed the tax at stake. Where US filings have been missed entirely, IRS streamlined filing may be the right entry route for eligible taxpayers.
• Restructure prospectively. Whatever the outcome on historic years, the forward position should be fixed so the mismatch cannot recur. Almost every case ends here.

The estate and succession dimension nobody raises

The LLC mismatch is not only an income tax problem. A membership interest in a US LLC is, on most analyses, a US-situs asset for US estate tax purposes, exposing a non-US-domiciled UK resident to a US estate tax charge on death with only a modest exemption available absent treaty relief. Meanwhile HMRC will look at the same interest for inheritance tax by reference to the owner's UK position. The characterisation debate that started as a credit relief argument reappears at death, with the added difficulty that the owner is no longer available to explain the operating agreement. Where an LLC interest forms a material part of an estate, it belongs in the trusts and estate planning conversation from the beginning, not as an afterthought.

What should a UK-resident LLC member do now?

Three questions, answered honestly, resolve most cases.

First: what does the operating agreement actually say about entitlement to profits? Not what you assume. Read the clause. If distributions are discretionary, the Anson route is likely closed and the planning must go elsewhere.

Second: what is the cash policy? An LLC that distributes fully each year has a narrow timing gap and a manageable problem. An LLC that accumulates has a widening one that compounds annually.

Third: what is the exit? A structure optimised for annual income is rarely the structure optimised for a sale. Choosing between them is the actual decision; everything else is implementation.

The through-line of this entire subject is that the US LLC is not a bad entity. It is an entity designed for a single tax system, deployed across two. Nothing in either country's rules is malfunctioning — they are simply answering the same question differently, and no one is obliged to reconcile them for you. The taxpayer bears the gap.

Speak to us before the next profit allocation

If you are UK resident and hold an interest in a US LLC — or you are about to form one — the decision you make before profits arise is worth several multiples of any argument you can make afterwards. Jungle Tax advises founders, executives and private clients on both sides of the Atlantic, and we handle the US and UK analysis under one roof rather than passing you between two firms who each see half the problem. We will tell you plainly whether your existing structure is defensible, what the historic exposure looks like, and what the forward position should be. Arrange a confidential consultation and bring the operating agreement — that is where the answer starts.