US LLCs

The Government has confirmed that it intends to address the double taxation that can arise for UK-resident individuals investing through US LLCs and other “reverse hybrid” entities. This mismatch can currently result in very high effective tax rates, in some cases exceeding 75%, due to the US taxing the individual directly on the LLC’s profits while the UK taxes subsequent distributions without giving credit for the US tax already suffered.

Following the recent consultation, the Government has rejected the proposed move towards treating these entities as transparent for UK tax purposes. Instead, it intends to introduce a new elective domestic foreign tax credit regime.

Under the proposed approach:

• certain entities, expected to include US LLCs and S-Corporations, as well as Jersey LLCs and French SCIs, would be specifically treated as opaque for these purposes;
• distributions to UK-resident individual members would continue to be subject to UK Income Tax at dividend rates;
• individuals could elect to claim credit against that UK tax for qualifying foreign taxes paid personally on the underlying profits, income and gains of the entity; and
• qualifying tax is expected to include US federal, state and local taxes, with the credit calculated using an average foreign tax rate rather than requiring detailed tracing of individual profits into distributions.

This is a potentially significant improvement for UK-resident, US LLC members, particularly founders, entrepreneurs and investors who currently face material double taxation.

However, the rules are not yet in force. A further technical consultation is expected before legislation is introduced in a future Finance Bill, with claims under the new regime expected to be possible from early 2028. The Government is also considering how to deal with earlier periods and existing disputes, but no solution for historic liabilities has yet been confirmed.

Our view: The announcement provides welcome direction of travel, but important detail remains outstanding, particularly around timing differences between US taxation of LLC profits and UK taxation of distributions. Individuals currently affected should therefore continue to review their existing position carefully rather than assuming that future relief will apply retrospectively.

Income Tax On Savings And Property Income

The Chancellor announced a further increase in the rates of income tax applying to savings and property income, reinforcing the Government’s distinction between income from work and income generated from assets. From 6 April 2027, savings income will be taxed at separate rates of 24%, 44% and 49% for basic, higher and additional rate taxpayers respectively. The same 24%, 44% and 49% rates will apply to property income in England, Wales and Northern Ireland. These rates are two percentage points higher than those previously scheduled to apply from April 2027.

Dividend income is not subject to this further increase. Dividend tax rates remain unchanged at 10.75% for basic rate taxpayers, 35.75% for higher rate taxpayers and 39.35% for additional rate taxpayers, with the Dividend Allowance remaining at £500. The Budget therefore creates a more pronounced distinction between different forms of investment return, with savings and property income facing higher rates.

Self-Assessment Tax Payments

The Government intends to move towards earlier and more regular payment of Self-Assessment tax, reducing the delay between income arising and the associated tax being paid. This is particularly relevant for US taxpayers looking to maximise their foreign tax credits on their US tax returns. Following consultation, the initial proposal to mandate collection through PAYE has been amended, to instead be available on an optional basis.

The reforms are expected from April 2029, supported by new digital tools to forecast liabilities and make payments during the year.

Practical impact: Those with significant or fluctuating investment, partnership, property or other non-PAYE income may need to forecast tax liabilities and fund payments earlier, making cashflow planning increasingly important. However, retaining flexibility over the method of payment is a welcome change.