The Anson Trap: Why UK-Resident Owners of US LLCs Risk Being Taxed Twice

The Anson trap describes how conflicting US and UK tax treatment of a US LLC can deny you foreign tax credit relief, exposing the same profits to tax on both sides of the Atlantic. For UK-resident owners of American LLCs, this classification mismatch is a genuine and costly double-taxation risk.

What is the Anson trap, and why does it threaten UK-resident LLC owners?

The Anson trap is the double-taxation risk that arises when the United States and HMRC treat the profits of the same US limited liability company in fundamentally different ways. In the US, a multi-member LLC is usually fiscally transparent. Each member is taxed on their share of profits as those profits arise. HMRC, however, has historically treated the same LLC as an opaque body corporate. As a result, it taxes the UK-resident member only when profits are distributed, and it characterises those distributions as dividends. This divergence matters because relief from double taxation depends on the same person being taxed on the same income. Consequently, the mismatch can sever the very link that a foreign tax credit requires.

The trap takes its name from the landmark case Anson v HMRC, which reached the UK Supreme Court. Importantly, it is not a loophole or an aggressive planning scheme. Rather, it is a structural conflict between two mature tax systems that classify the same vehicle in opposite ways. For wealthy cross-border entrepreneurs and fund partners, the stakes are substantial. Profits already taxed in America can face a second UK charge, with little or no credit to offset what was paid abroad.

How do the US and HMRC classify a US LLC so differently?

The divergence begins with the American check-the-box regime. Under these rules, a US LLC can choose how it is taxed. By default, a single-member LLC is disregarded, while a multi-member LLC is treated as a partnership. In both cases, the entity is fiscally transparent. Therefore, profits flow through to the members and are taxed as they arise, regardless of whether any cash is distributed. The Internal Revenue Service explains these classification elections in its guidance published on IRS.gov.

HMRC approaches the question from a different direction. Instead of asking how the entity has elected to be taxed, it examines the legal characteristics of the vehicle itself. In particular, HMRC considers whether the LLC has a separate legal personality, and whether it, rather than its members, owns the profits as they arise. Because a US LLC generally has separate legal personality, HMRC has long treated it as opaque, much like a company. Its approach is set out in the international manuals published on GOV.UK.

This produces a stark contrast. On the American side, the member is the taxpayer on the underlying profits. On the British side, the LLC is treated as the owner of those profits, and the member is taxed only on distributions. Ultimately, the two systems disagree about who earns the income and when.

Why does the classification mismatch break your foreign tax credit?

Foreign tax credit relief is not automatic. Whether it is claimed under the US-UK double tax treaty or under domestic rules, it generally requires the same person to be taxed on the same income in both countries. When the classification of an LLC differs, that alignment collapses. As a result, HMRC may argue that the US tax was charged on the LLC's profits, while the UK tax fell on a separate dividend.

Several distinct mismatches can each defeat a credit claim. In practice, they often combine, which compounds the problem.

• Timing mismatch: the US taxes profits as they arise, whereas the UK taxes distributions that may occur in a later year.
• Character mismatch: the US treats the receipt as business or trading profit, while the UK treats it as dividend income.
• Taxpayer mismatch: the US sees the member as earning the profit, whereas the UK sees the LLC as the earner.
• Source and measure mismatch: the amount taxed in each country, and the year it falls into, may simply fail to correspond.

Any one of these gaps can prevent the credit from working. When several apply at once, the outcome is often full economic double taxation. In other words, the same underlying profit is taxed twice, with no mechanism to relieve the overlap.

What did the Anson Supreme Court case actually decide?

The case concerned a UK-resident individual who was a member of a Delaware LLC. In the US, he was taxed on his share of the LLC's profits as they arose. When those profits reached the UK, HMRC sought to tax them again and refused a credit for the US tax. Its argument rested on classification. HMRC contended that the profits belonged to the LLC, so the sums the member received were a different income, namely a distribution.

The Supreme Court examined the specific LLC agreement and the relevant Delaware law. Crucially, it found that the members had an automatic entitlement to the profits as they arose, rather than a right that depended on a later distribution. Therefore, the income taxed in the US was the same income taxed in the UK. On that basis, the court allowed relief and reversed the earlier decisions against the taxpayer.

The judgment confirmed an important principle. Classification cannot be assumed from the label LLC alone. Instead, it turns on the precise terms of the operating agreement and the governing state law. For advisers, the case underlined that the paperwork behind each LLC genuinely matters.

How has HMRC responded to the Anson judgment?

Many expected the decision to reclassify US LLCs as transparent for UK purposes. However, HMRC took a narrower view. In guidance issued after the judgment, it stated that it would continue to treat US LLCs as opaque in most cases. Moreover, it indicated that it would apply the Anson outcome only where the facts were materially the same.

This response left considerable uncertainty in place. Because classification depends on the individual LLC agreement, two superficially similar structures can be treated differently. Consequently, a UK-resident member cannot safely assume that transparency, or opacity, will apply to their own arrangement. The relevant HMRC guidance and manuals remain available on GOV.UK for reference.

For high-net-worth owners, the practical lesson is caution. The Anson victory did not create a general rule that guarantees relief. Rather, it confirmed that each structure must be analysed on its own terms, ideally well before UK residence begins.

What does the Anson trap look like in practice?

Consider a scenario we encounter regularly. A founder builds a profitable American business and holds it through a Delaware LLC. Later, that founder relocates to the UK for family or lifestyle reasons and becomes UK-resident. In the US, the founder continues to be taxed each year on their full share of the LLC's profits, whether or not any cash is withdrawn. Meanwhile, HMRC treats the LLC as a company and looks only at what the founder actually receives.

When the founder eventually draws funds, HMRC may treat the payment as a dividend arising in that later year. The US tax, however, was paid earlier, on the profits as they arose. Because the two charges do not align in timing, character or taxpayer, the foreign tax credit can fail. The founder then bears US tax on the profits and UK tax on the same economic value, with no offset between them. This is the Anson trap in its purest form, and it can arise even where every return on both sides is filed entirely correctly.

The pattern is not limited to founders. A fund principal who becomes UK-resident can face the identical problem on carried interest allocated through a US LLC. Similarly, a passive investor in a US property LLC may accumulate US tax on rental profits while HMRC waits to tax later distributions. In each case, the trap is triggered not by wrongdoing but by two systems reading the same structure in opposite ways.

Recent reforms to the UK regime for non-domiciled and internationally mobile individuals add a further dimension. As the rules that once sheltered foreign income are reshaped, more UK-resident members may find their worldwide LLC profits within the UK net. Therefore, structures that were tolerable under older arrangements deserve a fresh review. Planning that once relied on the remittance basis may no longer deliver the same protection, which makes early analysis more valuable than ever.

Who is most exposed to the Anson trap and LLC double taxation?

Exposure is concentrated among internationally mobile individuals with meaningful US business interests. In our experience advising cross-border clients, several profiles recur again and again.

• UK-resident entrepreneurs who own or co-own an American operating business through an LLC.
• Private equity, venture capital and hedge fund principals holding carried interest, general partner stakes or management-company interests through US LLCs.
• Investors receiving profit allocations from US real estate or investment LLCs.
• Individuals who moved to the UK while retaining membership in an LLC formed years earlier.
• Partners in professional services firms structured as US LLCs, such as law or consulting practices.

Fund partners face particular risk. Carried interest and management fees frequently flow through layered LLC structures. Because these amounts are taxed in the US as they arise, a UK member can accumulate US liabilities long before any cash is distributed. If HMRC later taxes the distribution as a dividend, the timing gap alone can break the credit.

How can you structure a US LLC to avoid the Anson trap?

There is no single solution, and every option carries trade-offs. Nevertheless, several strategies can reduce the risk when they are considered early and coordinated across both jurisdictions.

• Review the LLC operating agreement and governing state law to assess the likely UK classification before you become UK-resident.
• Consider a US entity classification election so the LLC is taxed as a corporation, which can align treatment on both sides.
• Interpose a corporate blocker, or use a different vehicle such as a limited partnership or a corporation, where commercially appropriate.
• Align the timing of distributions with the periods in which the underlying profits are taxed in the US.
• Document members' entitlement to profits carefully, mirroring the features that made transparency available in Anson where that outcome is desired.
• Model the interaction with recent UK reforms to the taxation of non-domiciled and internationally mobile individuals.

Each route demands care. Electing corporate treatment, for example, can introduce a separate layer of US tax and may trigger anti-avoidance rules for controlled foreign companies or passive foreign investment companies. Similarly, restructuring an existing LLC can crystallise gains. Therefore, professional analysis is essential before any change is made.

What should UK-resident owners of US LLCs do now?

The Anson trap is a reminder that entity choice and tax residence must be planned together, not in isolation. If you own a US LLC and are UK-resident, or plan to become so, the classification of that vehicle deserves early and specialist attention. Above all, coordinate your US and UK advisers, because a step that is efficient in one country can prove costly in the other.

A practical first step is a classification review of each US LLC you hold, carried out jointly by US and UK specialists. This review should test how the operating agreement allocates profits, how the relevant state law treats members' entitlements, and how HMRC is likely to characterise the vehicle. Armed with that analysis, you can decide whether to retain the current structure, adjust the agreement, or move to a vehicle whose treatment is more predictable. Acting before residence changes almost always widens the options available.

At US-UK Tax, we help entrepreneurs, investors and fund principals navigate exactly these conflicts. To review how your LLC is likely to be treated on both sides of the Atlantic, you can contact our cross-border team at hello@us-uktax.com. With the right analysis, the double-taxation risk described here can often be managed and, in many cases, avoided.

This article is provided for general information only and does not constitute tax, legal or financial advice. Cross-border tax outcomes depend on individual facts and on current legislation in both countries. You should seek professional advice tailored to your circumstances before acting. For authoritative guidance, consult IRS.gov and GOV.UK.

Related reading and tools

• US Tax Services & IRS Compliance
• UK Tax Services
• IRS Streamlined Filing
• UK Income Tax Calculator
• US Federal Income Tax Calculator

Every situation is different. Book a cross-border tax consultation to discuss how these rules apply to you.