This article explores the Government’s proposals to reform the UK tax treatment of US LLCs and other reverse hybrids, with the aim of reducing double taxation and increasing certainty for taxpayers.

The government has launched an open consultation on reforming the way UK resident members of US limited liability companies and other ‘reverse hybrids’ are charged to UK tax.  This is an encouraging first step towards addressing a longstanding mismatch in tax treatment between the UK and the US that has created significant uncertainty for taxpayers and punitive rates of effective taxation.  We, as tax lawyers, most commonly see the issue arise when a US citizen comes to the UK holding interests in profitable LLCs.  The mismatch in treatment between the jurisdictions means taxpayers can be subject to a global effective rate of taxation of up to 75% on their share of an LLC’s profits.

Presently, UK taxpayers who want to avoid double taxation seek to rely on the Supreme Court decision of Anson v HMRC to make use of the UK/US double taxation treaty which, in theory, entitles them to credit for tax paid in the US.  In reality, HMRC takes the view that Anson was wrongly decided and distinguishable on the facts meaning that taxpayers at large cannot rely on the case to alleviate double taxation.  This means that despite having a Supreme Court case which, on its face, says that taxpayers can claim treaty relief, HMRC have put taxpayers on notice that anyone taking that position can expect an enquiry from HMRC.  We continue to work with clients to give them the legal comfort required to rely on the Anson case when filing their tax returns.

The government has, at last, recognised that this unattractive prospect is a barrier to investment and mobility, particularly for globally mobile individuals.  Although the consultation does not yet set out final proposals, its direction of travel is clear: the government is seeking a solution that provides greater certainty and reduces the incidence of double taxation.  In our view, a key objective of any reform should be to remove the need for fact‑specific Anson-type analyses and to provide a clear and consistent framework under which taxpayers are not subject to tax twice on the same economic income.

Encouragingly, the consultation does not limit itself to considering changes to taxation on LLC interests, but also other ‘reverse hybrids’.  We hope this means that individuals with interests in other entities, such as US ‘S-corporations’, will also benefit from the legislative product of this consultation.

In our view this consultation is an example of tax policy formulation done well.  The government is going out to taxpayers and tax professionals asking for their view of the problem, and how it can be solved.  Tax policies which have their genesis in consultations of this sort are invariably more successful and have fewer unintended consequences.  Perhaps the government has learnt its lesson from recent embarrassments (the APR/BPR reforms come to mind) and will now follow this format for future tax policy formulation.

The consultation is open until 31 July 2026.  We hope that any resulting policy announcements will be made in Budget 2026.