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You’re a UK-resident business owner or investor with a stake in a US Limited Liability Company (LLC). Every year you receive a Schedule K-1, you file your Form 1040, pay substantial US tax on your share of the profits, and assume that’s the end of the story.
Then your UK tax adviser calls. There’s another bill — from HMRC. Will the UK follow your US return and give you credit for the tax you’ve already paid?
Unfortunately, that’s not always what happens. In many cases, HMRC treats your US LLC very differently, and that difference can lead to unexpected — and sometimes painful — double taxation.
The US Side – How a US LLC Member Is Taxed
From the US perspective, an LLC is remarkably flexible. It can be taxed as a disregarded entity, a partnership, or a corporation, depending on elections made with the IRS.
In most cross-border cases, the LLC is taxed as a partnership, meaning its profits “flow through” to each member. The LLC files Form 1065, you receive a Schedule K-1, and you report your share of the income on your Form 1040.
When a non-U.S. partner is involved, the LLC also withholds tax under Section 1446. That withheld amount is shown on Form 8805 and credited against your US liability — it’s not an additional tax, though it often feels like one.
So far, it all seems straightforward: the US taxes you personally on your share of the LLC’s profits, even if you haven’t taken any money out.
But the UK sees things very differently.
The UK Side – How HMRC Classifies a US LLC
HMRC does not automatically follow the US tax classification. Instead, it applies a legal and factual test.
The UK looks at the rights of members, the entity’s constitution, and the way profits can be distributed. HMRC’s long-standing view is that a US LLC is “opaque”—it’s treated as a company rather than a partnership.
In practical terms, that means:
- The profits belong to the LLC, not the members.
- A UK-resident member is not taxed on those profits as they arise.
- Instead, HMRC taxes the member only when the LLC pays out money or assets — a distribution.
That distribution is taxed as foreign dividend income, not as trading or partnership income. If this feels out of step with your US experience, it’s because the two tax systems start from opposite ends of the same transaction.
Why the UK Ignores Your 1040 and K-1 Profits
In the US, you are taxed on profits allocated to you from the LLC.
In the UK, you are taxed on profits distributed to you from the LLC.
The US system is transparent — it looks straight through the LLC to the individual. The UK system is opaque — it treats the LLC as a separate entity.
As a result, your US 1040 figures and K-1 profits don’t form the basis of your UK tax return. HMRC doesn’t consider those profits to be “your income” until the LLC actually pays them out.
When you receive a cash distribution, that’s when the UK tax clock starts ticking. The income is assessed at dividend rates, and it appears on your SA106 Foreign Pages as a dividend from a US company.
The US tax you already paid? In most cases, it doesn’t count towards your UK liability.
Double Tax Relief – Why the Credit Often Fails
The UK–US Double Tax Treaty is designed to prevent double taxation — but only when both countries are taxing the same item of income in the same person’s hands.
The US says you’ve been taxed personally on partnership profits. The UK says you’re taxed personally on company distributions. Those are different things, legally speaking.
Because of this mismatch, the UK often won’t grant Foreign Tax Credit Relief for the US federal tax you paid on your K-1 profits. HMRC treats that as underlying company tax, not personal income tax, and only UK companies with significant shareholdings can claim relief for underlying tax.
That means many UK individuals face a second layer of tax when the LLC finally pays them. It’s not a mistake — it’s simply how the two systems interact.
Why This Feels Unfair – and HMRC’s Rationale
Most clients feel the system is unfair. After all, you’ve already paid thousands to the IRS — surely that counts for something?
HMRC responds: HMRC says that both countries are taxing different income streams. The US sees the profits as yours the moment they’re earned. The UK sees them as the LLCs until they’re distributed.
The Anson v HMRC case briefly gave taxpayers hope that LLC profits could be taxed on an arising basis in the UK, but HMRC interprets that case narrowly. Unless your LLC is structured almost identically to Anson’s, it’s unlikely to change your position.
That’s why every case needs careful, tailored analysis. Two LLCs formed in different US states, or with slightly different operating agreements, can lead to very different outcomes under UK law.
At Tax Accountant, we help UK residents with US business interests navigate exactly this kind of situation. Our cross-border specialists can review your structure, assess your exposure, and help you plan a strategy that avoids unnecessary double taxation. If you’re a UK-resident member of a US LLC, now is the time to act — before the next tax return is due. Get in touch today to discuss your situation confidentially and find out what your next step should be.