The United Kingdom taxes its residents on their income from interests owned in the United States. This includes US citizens residing in the UK.
The US also taxes the income of its residents on their world wide income. Without the relief from the US/UK tax treaty both countries would tax this income and it would be subject to double tax. Fortunately, the US/UK tax treaty mitigates this double tax in most situations.
One big exception is in the tax treatment of a US limited liability company (“LLC”). The US taxes this entity as a partnership and allows the income to pass through to the owners without an entity level tax. The UK taxes this entity as a corporation and imposes an entity level income tax. The result is that the unwary owner can be double taxed on the income from the LLC (once by the UK on the entity and again by the US on the owner’s income).
One good solution is to use a limited partnership (“LP”) in the US. Both the US and the UK treat LP as a flow through entity and tax its income only in the hands of the owner. No double taxation.
This works well if you use the LP from the beginning. However, it can also help if the LLC is in operation and the double taxation problem discovered. In most cases, the LLC can convert from the LLC to the LP without adverse US tax effects to the owners. See IRS Rev Rule 84-52.