The LLC problem: Is HMRC about to fix it?

Key Takeaways

Tax mismatch resolution: The new proposal fixes the conflict where the US views LLCs as transparent but the UK views them as opaque

Automatic transparency proposed: HMRC proposes making tax-transparency mandatory rather than elective meaning individuals will automatically be taxed on profits as they arise.

Wealth structure review: Current wealth structures built around the old rules will need a comprehensive review to adapt to the mandatory changes.

The issue in plain English

Many internationally mobile clients, particularly those with US connections, invest through US Limited Liability Companies (LLCs).

The problem is that:

• The US generally treats LLCs as transparent (the owners are taxed directly on profits).
• The UK generally treats LLCs as opaque (the company is taxed separately and owners are taxed when money is distributed).

This mismatch can lead to the same economic profit being taxed twice, with limited ability to claim foreign tax credits. For some UK-resident individuals, the combined tax burden can exceed 70%, making LLC structures highly inefficient.

What HMRC is proposing

HMRC has launched a consultation (ending 31st July 2026) proposing that certain vehicles should be treated as transparent for UK tax purposes when owned by UK-resident individuals. Under the proposal:

• Individuals would be taxed on LLC profits as they arise.
• Distributions would largely become tax-neutral.
• The double taxation problem would disappear.
• The tax treatment would become clearer and more predictable. No more endless debates over whether an LLC is Schrödinger's company: simultaneously transparent and opaque.

Importantly, HMRC is currently proposing that this treatment would be automatic rather than elective.

What does this mean for me?

Potential better outcomes for UK-Resident US clients: Many UK-resident Americans and globally mobile clients hold investments through LLCs. The proposed change could significantly reduce tax leakage and improve after-tax returns.

Structure reviews may be needed: Many existing structures were designed around the current rules. If transparency becomes mandatory a full review of structuring will be needed

Greater certainty: There has long been uncertainty around whether certain LLCs should be treated as transparent or opaque in the UK. The proposal would provide a much clearer framework for advisers and clients.

Legacy issues: For current holders who have LLC structure it will be interesting to see if HMRC will apply any rules retrospectively to any distributions trapped within existing LLCs 

What next?

This is one of the most significant UK tax developments for internationally mobile clients in recent years. If implemented this changes the tax landscape and gives us a completely different angle to look at in structuring.

If you have any questions about your structuring and how we can help, please contact one of the team at W1M.

Glossary

HMRC: His Majesty's Revenue and Customs, the UK government department responsible for collecting taxes.

Limited Liability Company (LLC): A US business structure that protects owner assets while offering flexible tax options.

Transparent entity: A tax structure where profits pass directly to the owners, who pay tax on their personal returns.

Opaque entity: A tax structure where the company itself is taxed on income, and owners are taxed separately on distributions.

Tax leakage: The loss of total wealth or investment returns due to inefficient or double taxation.