Preparing for the Unpredictable with Crypto and Inheritance Tax

 

They say only two things in life are certain: death and taxes. But when it comes to cryptoassets, certainty is in short supply, particularly over the long term. The value of your digital holdings in 30 years could triple, or be close to nothing (who knows!).

 

One more certain thing: if you’re a UK-domiciled individual, your cryptoassets could be subject to Inheritance Tax (IHT) on your death.

 

So, if you could take steps today to protect that value (whatever it may be in future) wouldn’t you want to?

The Basics

 

Inheritance Tax is a tax on the estate (property, money, and possessions) of someone who has died. In the UK, the standard rate is 40%, applied to the value of the estate above the nil-rate band, which is currently £325,000.

Cryptoassets, for legal and tax purposes, are treated as personal property. This means they form part of your estate and are therefore assessable for IHT purposes. They can also be held within a trust.

 

Practical Challenges

 

Valuation

 

Given the high volatility of cryptoassets, it is crucial to obtain an accurate valuation of crypto holdings as at the date of death. This is easier said than done and may require retrospective valuation evidence or professional assistance to ensure accuracy.

 

Access

 

While IHT applies based on the value of the estate, access to that crypto presents a unique problem.

Unlike traditional financial assets (e.g., bank accounts, investments, or property), cryptocurrencies are stored in digital wallets, which can only be accessed using private keys, passwords, seed phrases, or login credentials.

Without these details, your Executors will be unable to access the assets. This makes proper planning and secure transmission of this information essential when incorporating any gift of cryptoassets in your will.

 

Lost Crypto

 

We have seen first-hand a situation where a client’s relative passed away holding a substantial crypto portfolio. Unfortunately, with no private key or access details left behind, the crypto could not be accessed and was ‘lost’ forever.

In that case, despite the assets being inaccessible, without applying reliefs they were still technically liable for IHT on their value at the date of death. So, does this mean you have a hefty IHT bill without the funds to pay it? That doesn’t seem fair to us.

There is a provision which considers changes in the value of the estate’s assets caused by death (e.g., if access is lost due to death) that can be taken into account. Therefore, if crypto becomes irrecoverable because of death, there may be an argument that the fall in value should be treated as if it occurred before death, reducing the tax burden. However, this is a nuanced and evolving area, HMRC guidance does not give a view on this and it is yet to be tested in the courts.

 

Planning Ahead

 

With the above challenges in mind, it’s important to plan ahead. Despite the complications, the core principles of estate planning still apply.

However, a balance needs to be struck between planning to reduce IHT, providing clear access instructions in the event of your death, and maintaining the security of those assets during your lifetime (and post-death).

 

Examples of IHT Planning

 

1. Gifting: Gifting cryptocurrency during your lifetime can reduce your estate’s value, and if you survive seven years, the gift may be fully exempt from IHT.
2. Spousal Transfers: Transferring crypto to a spouse or civil partner is IHT-exempt and helps defer tax until the surviving partner’s death.
3. Life Insurance Policies: A life insurance policy written in trust can be used to cover the IHT liability arising from crypto holdings.
4. Use of Trusts: Placing cryptoassets into discretionary trusts can be a useful tool for passing on the assets securely and removing them from your estate for IHT purposes.
5. Use of Family Investment Companies (FICs): Holding crypto in an FIC may allow control while transferring value to the next generation in a tax efficient way.

 

Other Practical Steps

 

1. Keeping a clear inventory – What assets do you own? On which platforms or wallets are they held? Are they staked or part of a liquidity pool?
2. Secure but separate storage of sensitive data – Avoid listing private keys in your will. Instead, reference a securely stored, encrypted inventory, and review this data regularly.
3. Security planning – Use multi-signature wallets, trusted family members as co-signers, or “Dead man’s switch” mechanisms.
4. Use a solicitor – Ensure your will makes express reference to your cryptoassets and clearly sets out how they are to be passed on, and to whom.

 

A Word on Mindset

 

Cryptoassets should be treated like any other estate asset. But due to the nature of the technology, and the mindset of many crypto enthusiasts, planning can be more complicated than for traditional holdings.

Many holders pride themselves on autonomy and privacy. But without practical estate planning, that same autonomy could result in family members being left with no access to the cryptoassets.

 

Conclusion

 

Crypto is volatile, complex, and often misunderstood. But that doesn’t mean it can be ignored for inheritance planning purposes. On the contrary, it makes planning all the more important, not only to preserve value but also to ensure those precious assets land safely in the hands of your loved ones.

If you or your clients hold cryptoassets, there is no time like the present to take stock, plan sensibly, and put the necessary safeguards in place. The earlier you plan, the better. That way, the value – whatever it may be in future – has the best chance of making it into the hands of those you care about, and not just HMRC.

 

Next Steps

 

If you would like tailored advice on cryptoassets and inheritance tax planning, please get in touch with the team at ETC Tax and we’d be happy to help.

Head over to our crypto section on our website to see how we can support you when dealing with our crypto.