Tax tip: Income from a US limited liability company or S corporation

UK taxpayers with US limited liability company (LLC) and S corporation (corp) income can face a double tax whammy as the tax treatment of these entities in the US and the UK is fundamentally different. While these organisations have ‘limited liability’ from a standard legal perspective from an IRS perspective they are treated as ‘pass through’ entities for tax purposes. Hence individual shareholders or members treat the income as directly reportable on their US individual tax returns and pay US income taxes on their share of profits.

For UK tax purposes however HMRC regards these entities as opaque companies. As such members/shareholders are not taxed directly on the profit of the entity but only when they receive distributions or dividends from the relevant entity.

So what is the problem? This disconnect between the UK and US tax treatments of the income from these entities can...