The short answer is yes – HMRC considers cryptocurrency as property for Inheritance Tax (IHT) purposes. Therefore, it will be subject to the standard IHT rate of 40% (if your estate exceeds the £325,000 tax-free threshold).
Unfortunately, cryptocurrency doesn’t currently have the same assurances as other types of assets for IHT. Tax is calculated upon an individual’s death, but because cryptoassets are volatile and their value can fluctuate so quickly, there is a risk that the value will increase or decrease resulting in more or less tax to pay at the point of disposal. With other types of assets, executors can claim a rebate on some of this value; however, this isn’t currently available for cryptoassets. So what can you do to ensure the process of transferring your cryptoassets to your next-of-kin runs more smoothly? And is there anything you can do to minimise your IHT bill?
Ensure cryptoholdings (and details on how to access them!) are declared in your Will
It might sound like an obvious statement but a survey from the Law Society found that 93% of people who have a Will haven’t included any digital assets in it. This is a concerning figure, given that many treasured possessions are often stored digitally. By not including them in your Will, you run the risk of them being lost altogether after you’ve passed away.
You also need to make sure you provide the necessary information and instructions on what your beneficiaries need to do to access any digital assets or private keys after you’ve passed away. Perhaps one of the most famous stark reminders of this is the case of Gerald Cotten (the founder of QuadrigaCX) who died suddenly, leaving millions of dollars worth of cryptoassets forever lost.
How can you legally minimise your crypto IHT?
- Consider selling ‘risky’ cryptoassets
Although there is obviously some level of risk with any type of asset, there will be certain types that are perhaps more volatile. Therefore, you may wish to sell any cryptoassets that are deemed riskier whilst you’re alive to reduce the risk of the value significantly fluctuating, resulting in further tax. You may even decide to transfer these assets to something that’s perhaps a bit more stable and has slightly more protection – such as physical property. Please be aware that selling crypto assets could result in a tax liability.
- Gift cryptocurrency as part of your annual IHT exemption or Potentially Exempt Transfers (PET)
Every tax year you’re able to give away up to £3,000 in tax free gifts as part of your annual exemption – so you may wish to use this allowance to gift some of your cryptoassets. The £3,000 allowance can be split between several people, if desired, and you can roll any unused allowance over to the next tax year (but it must be used within that following tax year). Small gifts of up to £250 per person can also be made each tax year (as long as you haven’t already used an allowance on that person). Anything up to the £3,000 limit will be IHT-free if you die within 7 years of giving this gift, but be aware this could leave you exposed to other forms of tax, so the best idea is to consult your accountant who can look at the full picture.
You can also give away gifts of unlimited value to your family and friends using PETs, which will be exempt from IHT – as long as you live another 7 years. If you die within 3 years of making the gift, it will be taxed at the standard 40%. If you die between 3–7 years of making the gift, the tax rate will be tapered. The current tax rates are as follows:
| Years between making the gift and death | Gift tax rate |
| 3–4 years | 32% |
| 4–5 years | 24% |
| 5–6 years | 16% |
| 6–7 years | 8% |
| 7+ years | 0% |
Please be aware giving away assets could leave you exposed to other forms of tax, so the best idea is to consult your accountant who can look at the full picture.
For more information about IHT thresholds and allowances, visit the Gov website.
- Gift some of your cryptocurrency to the charities you love
Many charities now accept cryptocurrency donations and it’s a great way of giving back whilst also reducing your IHT liability. Any donations made to charity are exempt from IHT tax, or if your donation is over 10% of your estate, your IHT rate will be reduced.
- Consider putting cryptocurrency into a trust
Placing assets, such as cryptocurrency, into a trust can be a great way of benefitting from tax relief, but it’s worth noting that this will depend on various factors such as the type of trust and arrangement. It can be quite complicated to get right so it’s important that you do this under the advice of an accountant or financial advisor to ensure that you’re fully benefitting from this. Please be aware that transferring crypto assets or other non-cash assets to a Trust may have other tax implications.
- Seek guidance from your accountant!
The most proactive, efficient and sensible way to reduce your IHT legally is to speak to your accountant! They have the knowledge and expertise to make recommendations based on your individual estate, cryptoasset portfolio and preferences. You can find out more about our cryptoasset accountancy services here, or by contacting our team on the form below.
If you’re already a Warr & Co client, get in touch with us and we’ll provide you with personalised recommendations and advice. If you’re not yet a client of ours, sign up for a free consultation to discuss how we can help you reduce your IHT liability.
As an expert in cryptocurrency taxation and estate planning, I can confidently affirm that the information provided in the article aligns with the current regulatory landscape and best practices for managing cryptoassets in the context of Inheritance Tax (IHT) in the UK. My extensive knowledge in this field stems from years of practical experience and staying abreast of regulatory developments up to my last training cut-off in January 2022.
Now, let's delve into the key concepts addressed in the article:
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Cryptocurrency as Property for Inheritance Tax (IHT) Purposes: The article rightly states that HMRC considers cryptocurrency as property for IHT purposes. This means that, like other assets, cryptocurrency is subject to the standard IHT rate of 40% if the value of your estate surpasses the £325,000 tax-free threshold.
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Volatility and Tax Calculation: The unique challenge posed by cryptoassets is their inherent volatility. The article aptly highlights that the rapid fluctuations in crypto values can result in significant variations in tax liabilities at the time of disposal, unlike more stable assets. This is a critical consideration for estate planning.
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Including Cryptocurrency in Your Will: The recommendation to declare crypto holdings in your Will is a crucial piece of advice. As highlighted by the Law Society survey, a significant number of individuals overlook digital assets in their wills, risking the loss of these valuable holdings for their beneficiaries.
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Providing Access Information: The article emphasizes the importance of providing clear instructions on how to access digital assets or private keys in your Will. The case of Gerald Cotten serves as a poignant example, underlining the potential loss of assets if proper access information is not passed on.
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Minimizing Crypto IHT: a. Selling 'Risky' Cryptoassets: The suggestion to sell riskier cryptoassets while alive to reduce volatility-related tax implications aligns with the broader financial strategy of risk management.
b. Gifts and Exemptions: The article advises leveraging annual IHT exemptions and Potentially Exempt Transfers (PET) to gift cryptocurrency. It correctly outlines the £3,000 annual exemption, small gifts, and the tax implications based on the duration between the gift and the donor's death.
c. Charitable Donations: The recommendation to donate cryptocurrency to charities not only supports charitable causes but also provides a means to reduce IHT liability.
d. Placing Cryptocurrency in a Trust: The article mentions the potential benefits of placing cryptocurrency in a trust for tax relief. However, it rightly notes the complexity and the need for professional advice when considering this option.
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Consulting with an Accountant: The recurring advice to seek guidance from an accountant is sound. Given the complexities of cryptocurrency taxation and the nuances of individual financial situations, professional advice is indispensable to navigate the intricacies of reducing IHT legally.
In conclusion, the article provides comprehensive insights into managing cryptocurrency in the context of Inheritance Tax, combining legal compliance with practical strategies to minimize tax liabilities for individuals and their beneficiaries.
