Tax considerations of US Limited Liability Companies (LLCs) for UK residents

Case study 1 – UK resident and UK domiciled, with an interest in a US LLC

Lyle is UK resident and UK domiciled. He has an interest in a Californian LLC, which holds an underlying interest in some commercial property. Lyle understands that he needs to report his share of the profits annually on his US non-resident income tax return. However, as he is resident in the UK, he is unsure of the UK tax treatment.

For UK tax purposes, an LLC is an opaque entity whereas for US purposes it is transparent. The implication of this mismatch is that Lyle is personally subject to US tax on the profits of the LLC as they arise, whereas for UK purposes, he would only be subject to tax as payments are distributed by the LLC to him. A further implication of this mismatch is that there is no tax credit in the UK for US tax paid on the same profits. 

There are two potential routes that may mitigate the tax implications that this mismatch in treatment creates.

2. Capital distributions

The UK taxes capital and income distributions from companies at different rates. Capital distributions are subject to UK tax at a 10% or 20% after the application of a tax-free annual exemption of £12,300. Income distributions by contrast are subject to tax rates of up to 39.35%. Accordingly, if the distributions from Lyle’s LLC are capital, this could reduce the UK tax cost. 

If the LLC were to be liquidated, the distributions to Lyle would be capital. The UK tax on the distribution would be substantially reduced (in the above example, he would be subject to 20% rather than 39.35% UK tax on the distribution), thereby substantially reducing Lyle’s global tax bill. Review and advice is needed in a liquidation process to align the UK and US position, and consideration of Lyle’s personal circumstances would also be needed.

Lyle would also be subject to a capital gain if he were able to sell his interest in the LLC. The US position would be for the LLC to dispose of the underlying US real estate as part of the liquidation event, so that the same economic gain is subject to tax in the US and UK. Under the US/UK tax treaty there’s potential for double tax relief to be available on the UK tax return where the underlying asset being disposed of is US real estate. Long-term gains are currently subject to a Federal income tax rate of 20%, however, you may need to factor in Net Investment Income Tax (NIIT) at 3.8% and potentially State tax. 

What should you do?

If you’re resident in the UK and looking to invest in a US LLC, or you're looking to structure your business in the US under an LLC, it’s quite possible that if long term growth is the aim, there could be some relief from higher taxation. Get in touch with our dual qualified UK/US tax experts upfront, to understand the risks.

Case study 2 – US citizen with LLC interest, becoming UK resident 

Jaime is a US citizen considering a move to the UK and is seeking pre-immigration UK/US tax advice. Jaime has a minor interest in a private equity fund structured through a New York LLC. 

Remittance basis claim

On the basis that there could be a problem if Jaime was to receive distributions from the fund while UK resident, and has no say on whether the fund can distribute or accumulate profits, one solution could be for Jaime to claim the remittance basis of taxation.

The remittance basis of taxation is available to UK resident non-UK domiciliaries for the first seven tax years of UK residency (out of the previous nine). Thereafter, there is a remittance basis charge of £30k/£60k p/a for the privilege, and after 15 years (out of 20) of residence there is no ability to claim the remittance basis.

The advantage of claiming the remittance basis in a particular tax year is that foreign income in that tax year can’t be taxed in the UK, unless it is remitted to the UK. Therefore, this avoids the LLC distribution from being taxed in the UK, so avoids this additional tax charge on top of the US and New York tax on the LLC profits.

What should you do?

If you’re a US person coming to the UK with an LLC investment or business already in place, you should factor this into your pre-immigration planning. Get in touch with our dual qualified UK/US tax experts to establish whether making use of the remittance basis of taxation could be the solution for a certain number of years of UK residence.

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