Sophie St John
- Partner
- Private Client
Potential changes to the taxation of Limited Liability Companies in the UK
When it comes to tax, United States (US) citizens are accustomed to complexity. It is well-known that the US taxes its citizens even if they move abroad, making it the only developed country in the world to do so. What may be less well known is that US citizens and foreign investors into the US face another challenge: Limited Liability Companies.
Limited Liability Companies are common vehicles used for investing in the US. They are often seen as necessary for non-tax reasons, such as providing protection from the relatively litigious legal landscape in the US. For example, we understand that they are often recommended to landlords in the US, to provide a degree of protection by claims from tenants.
Current issues
The difficulty with these entities is that the UK tax authority, HMRC, generally takes the view that double tax treaty relief is not available, where they are held by UK residents. This can be a disincentive for those with Limited Liability Companies to live and work in the UK.
HMRC’s view on this issue means that both US and UK tax apply to the same profits of the Limited Liability Company in full, without any credit for the other country’s tax on the same profits. This can lead to stark results. For example, profits of £150,000 could suffer an effective tax rate of over 60%.
Potential reforms
As reported by the Financial Times in April, the Chancellor, Rachel Reeves, was said to use a trip to Washington to announce that the law would be changed so that this double taxation would cease.
The report stated that this was as part of a bid to lure wealthy investors back to the UK and to market the UK as a safe haven, in contrast to the United Arab Emirates.
The report went on to add that a consultation would be promised, giving the public and practitioners an opportunity to give their views on this reform.
If eventually introduced, such a reform would be welcome news for clients with interests in US Limited Liability Companies.
It remains to be seen whether the consultation will also clarify the treatment of other common US estate planning arrangements, such as revocable trusts.
What should I do if have a Limited Liability Company?
HMRC’s current view that double tax treaty relief does not apply is only one interpretation and is not necessarily always proved correct. Indeed, in Anson v HMRC (2015) UKSC 44, the Supreme Court disagreed with HMRC, and allowed treaty relief for a Delaware Limited Liability Company. For technical reasons, that judgment is not automatically binding, but it can assist taxpayers in some circumstances.
Depending on the governing documents and state law that applies in a particular case, the Anson judgment might provide some taxpayers with the opportunity to conclude that treaty relief applies. This could be useful before any potential law change (if any), as it cannot be guaranteed that the law will change with retrospective effect.
How we can help
Wedlake Bell’s Private Cient team has specialists who can advise US-connected clients, including those with interests in Limited Liability Companies, on their UK tax liabilities and cross-border estate planning, and can examine the relevant documents and advise on the prospects of treaty relief applying for affected individuals. For further information, please contact Sophie St John, Andrew McIntyre, or your usual Wedlake Bell adviser.
This article is for general information purposes only and does not constitute legal advice or a comprehensive statement of the law. Specific legal advice should always be sought in relation to individual circumstances.
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Andrew McIntyre
- Senior Associate
- Private Client
