Budget 2026: New tax credit proposals to address US LLC double taxation

In summary

• The Budget confirmed that legislation addressing double taxation for UK residents investing in US LLCs and other reverse hybrid entities will be in the Finance Bill 2027/28

• Proposals in June’s consultation to treat eligible entities as transparent for UK tax purposes have been dropped in favour of an elective domestic credit for individual investors

• The entities the government expects to specify include US LLCs, US S corporations, Jersey LLCs and French sociétés civiles immobilières

• It says that claims for the new credit will be possible from early 2028, but, while has acknowledging concerns about previous tax years and ongoing disputes has not confirmed that the new relief will apply retrospectively

The announcement, made alongside the Autumn Budget 2026, follows a consultation launched in June 2026. Rather than proceeding with its initial proposal to treat eligible entities as transparent for UK tax purposes, the government intends to develop an elective credit for foreign tax paid personally by investors.

This is a welcome development for individuals who have faced high effective tax rates because the UK and the overseas jurisdiction tax their investment on different bases. However, the detailed rules remain subject to further consultation, and the government says claims will be possible from early 2028.

A US limited liability company, or LLC, is a common vehicle for holding investments and carrying on business in the United States. For US federal tax purposes, an LLC is often treated as transparent: Its members are taxed on their share of the underlying profits, income and gains as they arise.

For UK tax purposes, HMRC generally treats US LLCs as opaque entities. On that basis, a UK-resident individual member is usually taxed when the LLC makes a distribution, commonly as dividend income.

The difficulty is that the US tax and the UK tax may be charged on different legal amounts: The US taxes the member on their share of the LLC’s underlying income, while the UK taxes the member on a distribution. As a result, double tax relief may not be available even where the two charges relate economically to the same profits.

The outcome can be a particularly high combined tax burden. In its response, the government notes that respondents commonly reported effective rates of between 55% and 75%, with some examples exceeding 80% after taking account of US state and local taxes.

The government’s original consultation explored allowing UK-resident individuals who are members of eligible reverse hybrids to treat their interests as transparent for UK income tax and capital gains tax purposes. The intention was to align the UK charge more closely with the overseas charge.

The government has now concluded that a credit-based approach is preferable. A transparency regime would require extensive technical rules and could be difficult to operate, particularly for minority and indirect investors, who may not have access to the information needed to calculate their share of the entity’s profits under UK tax rules.

It also noted concerns that a transparency regime, as originally proposed, could exclude some affected by the problem, including members of single-member entities and some businesses with a UK presence.

The government intends to introduce an elective domestic credit for individual investors in specified reverse hybrid entities.

Its current plans are that:

• Specified entities would be treated as opaque for UK tax purposes

• Distributions to individual members would be subject to UK income tax at dividend rates

• An individual could elect to claim a credit for eligible foreign taxes they personally paid on the entity’s profits, income and gains

• The credit would be calculated using the investor’s average rate of foreign tax under mechanical rules, rather than requiring the tracing of particular profits into a distribution

• Eligible taxes would include foreign federal, state and local taxes

The entities the government expects to specify include US LLCs, US S corporations, Jersey LLCs and French sociétés civiles immobilières. The entity itself could remain subject to UK corporation tax under the usual rules where applicable.

This approach is intended to reduce excessive effective tax rates while retaining the UK taxation of distributions. The government suggests that the outcome would often be broadly comparable to that of an individual investing in a business through a UK limited company.

That does not necessarily mean that every investor’s combined liability will be limited to the higher of their UK and overseas personal tax rates, however. The result will depend on the final design of the credit and the individual’s circumstances.

The response sets out a policy direction rather than final legislation, and the government has identified several matters for further consultation, including:

Calculating an effective foreign tax rate where an entity receives different types of income and gains

Dealing with timing differences between the foreign tax charge and the UK taxation of a distribution

Arriving at an equitable result where foreign tax rates differ from UK dividend rates, including where devolved income tax rates are relevant

These details will be particularly important where profits are retained for several years, where distributions do not correspond neatly to the period in which foreign tax was paid, or where an investor holds an interest through a more complex structure.

The government says claims for the new credit will be possible from early 2028. The Budget states that legislation is planned for the Finance Bill 2027/28, following further technical consultation.

The government has acknowledged concerns about previous tax years and ongoing disputes and says it is considering practical options to address them. It has not, however, confirmed that the new relief will apply retrospectively.

Individuals should therefore avoid assuming that foreign taxes already paid, or distributions made before the new rules take effect, will automatically qualify.

For UK resident individuals with interests in US LLCs or other reverse hybrids, the announcement provides a clearer direction of travel, but the existing rules continue to matter while the new mechanism is developed.

Those affected may wish to review their structures and keep records of:

• Their interests in relevant entities and the terms governing distributions

• Foreign taxable income and gains allocated to them

• Federal, state and local taxes paid personally

• Distributions received and the UK tax treatment applied

• Any open HMRC enquiries, appeals or other disputes concerning earlier years

The government’s proposed move towards a credit mechanism is a potentially important step in resolving a longstanding cross-border tax problem. The value of the reform for individual investors will depend on the detailed legislation, particularly how the credit is calculated, how timing differences are managed and whether any relief is offered for historic periods.