Measure
The government has announced a new domestic foreign tax credit mechanism to address double taxation of UK resident individuals investing in US limited liability companies (LLCs) and other 'reverse hybrid' entities. The announcement is set out in HMRC's consultation response published at Budget 2026, following the consultation launched in summer 2026.
US LLCs are generally tax-transparent in the US but treated as opaque by HMRC, meaning that UK residents can face UK dividend tax of up to 39.35% on distributions which are made net of US taxes paid. Double tax relief is often unavailable and the mismatch between UK and US taxation can result in effective tax rates exceeding 75%.
The government will introduce a new domestic foreign tax credit mechanism to address the double taxation arising from the different UK and overseas tax treatment of reverse hybrids. The announced approach is therefore a credit-based solution, rather than treating foreign entities as transparent if they are transparent in the overseas jurisdiction, as was considered in the consultation document.
The detailed operation of the credit remains subject to a forthcoming technical consultation and legislation to be included in Finance Bill 2027/28. Detailed eligibility conditions, the calculation of the credit and the claims process will need to be established through the technical consultation and legislation. The treatment of existing holdings, historic foreign tax and distributions spanning the introduction of the new credit will be considered as part of the consultation.
The government has said this change will cost £5m a year by 2031/32, with peak expenditure of £10m a year in 2029/30.
UK resident individuals who own, or are a member of, a US LLC or other reverse hybrid entity, including US citizens who have moved to the UK or are considering doing so.
The government intends to launch a technical consultation shortly and legislate in Finance Bill 2027/28. It states that claims for the new credit will be possible from early 2028. This does not, by itself, establish the first tax year or the periods of income and foreign tax covered by the credit.
This has been a long-standing issue for the US private client community, as well as individuals with interests in certain other foreign entities that have the same tax profile, and the government's response recognises that double taxation of reverse hybrid investments can affect decisions to move to, or remain in, the UK. The proposed domestic foreign tax credit mechanism is a welcome step towards addressing that mismatch and providing greater certainty, with the potential to reduce the high effective tax rates that can arise under the current rules.
The detail will matter considerably. A credit-based approach raises different implementation questions from automatic or elective transparent treatment, particularly how foreign tax will be matched to UK-taxable distributions where the two arise in different periods. We await the technical consultation with interest.
If implemented effectively, the new credit could reduce a well-known deterrent to American relocation to the UK, supporting the government's ambition to attract internationally mobile individuals and their capital. However, the response is not a basis for assuming that all double taxation will be eliminated or that the underlying UK classification of LLCs has changed. The case in Anson v HMRC [2015] UKSC 44 remains a reminder of the fact-specific nature of the existing position.