Autumn Budget 2026 - US LLC tax relief and endowed UK charities
Chancellor Healey stated last week that he would take measures to relieve the double taxation caused by inconsistent treatment of U.S. limited liability companies ("LLCs") by the UK and the United States, as you may have seen. UK clients and friends are always to be rewarded when showing interest in the tax status of offshore entities, but these measures will not apply to UK charities. Also, LLCs are a rare U.S. investment vehicle for UK charities.
Nevertheless, we provide below:
The context of the Chancellor’s statement as an attempt to solve a problem in the private equity/venture capital industry that has been bothering UK resident managers for many years
A discussion of the applicable rules going forward in the rare case of a UK charity investing in an LLC.
Some UK Resident Individual Partners of U.S. PE/VC Funds Have Suffered Double Taxation
LLCs are commonly used as entities to receive carried interest and management fee, to be shared among the members, from U.S. private investment funds. Double taxation of UK resident individual members of such LLCs arises from the LLCs' status as "reverse hybrids", namely corporates for UK tax purposes and partnerships for U.S. tax purposes.
LLCs by default are treated as transparent for U.S. tax purposes, i.e., as partnerships when there is more than one member. (This default treatment can be avoided if the LLC files a simple election with the IRS for opaque treatment, which is done in a minority of cases). HMRC, however, has treated LLCs as opaque corporates for UK tax purposes since 1997, and continues to do so despite having lost in the Supreme Court a case brought by a private equity fund partner, George Anson. Anson v HMRC, [2015] UKSC 44.
Thus, in the normal case, a UK resident individual LLC member is taxed on LLC distributions as dividend, and cannot reduce such tax by crediting U.S. tax paid on their share of the LLC's profit (as required by the U.S. taxation of partnerships owned by non-residents) because the U.S. tax paid and the tentative UK tax on the dividend are not considered computed on the same profits or income.
In June, the Government opened a consultation on how to mitigate this double taxation of LLC profits, having understood:
The LLCs' popularity for carried interest and management fee entities in U.S. private investment funds
That the high effective tax rate on UK resident members of such entities disincentivises talented individuals from remaining or settling here.
On Budget Day, the Government closed the consultation by anticipating a legislative change in the 27/28 Finance Bill that would allow only UK resident individual members of LLCs an elective credit for foreign, underlying tax associated with the dividend, subject to further consultation.
So, because Healey is taking action to encourage talented and mobile people to live in the UK as part of the growth agenda, his measures will not affect UK charities - even if they take the form of trusts subject to income tax. This is sensible also because double taxation would not arise to UK charities on distributions from reverse hybrid LLCs because dividends are exempt in their hands - provided that they apply the cash to charitable purposes.
In the rare case of an investment by a UK charity in an LLC, what rules will apply going forward to determine an LLC's status?
UK charities do not typically provide capital to U.S. general partner or management entities, although it has been known to happen. Apart from those cases, LLCs are not commonly used in U.S. private investment fund structures.
Although unlisted U.S. REITs are often formed as LLCs, they always elect U.S. opaque status and so will be treated as corporates for both U.S. and UK tax purposes (i.e., non-hybrids).
However, A UK charity that invests directly in U.S. small/medium enterprises, for example to progress medical research or other "impact" goals, may encounter an LLC that has not elected U.S. opaque treatment. In determining such an LLC's status, a UK charity would be entitled to treat it as opaque for UK tax purposes given HMRC's consistent position since 1997 and its detailed critique of the Supreme Court's decision in the Anson case set out in INTM180050. Again, this reverse hybrid treatment (transparent for U.S., and opaque for UK, purposes) would benefit a UK charity because it avoids double taxation by exempting the dividend (assuming that it applies the cash to charitable purposes).
Key takeaways for UK charities
In sum, UK charities investing in the United States should sidestep this tax controversy affecting U.S. private investment fund managers, which has attracted so much deep thinking in the UK tax bar and government.