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Cryptocurrency and Inheritance Tax

cryptocurrency

Despite the value of Bitcoin plummeting in 2018, more and more people are deciding to invest in cryptocurrencies. As a result, there is now more guidance on how to hold and manage these investments, as well as how to incorporate them into inheritance tax planning for your estate. However, it is important to note that there are many practical difficulties with leaving digital assets to your heirs. This guide outlines the key things you need to be aware of when managing your cryptoassets. 

What is Cryptocurrency?

The HMRC defines cryptocurrency as:

‘cryptographically secured digital representations of value or contractual rights that can be transferred, stored or traded electronically. While all cryptoassets use some form of Distributed Ledger Technology (DLT) not all applications of DLT involve cryptoassets.’


Put simply, cryptocurrency, such as Bitcoin, is a ‘digital’ or ‘virtual’ currency which has been created by ‘distributed ledger technology’, a network of computers that has no central control. This means that each computer has equal access to the main network. Cryptocurrencies use encryption methods to regulate their units of currency and to verify the transfer of funds. However, these processes function independently of banks.

Do I have to pay Inheritance Tax on my cryptoassets?

In guidance published on 19th December 2018, the HMRC classified cryptocurrency as ‘property’. Therefore, any cryptocurrency you own will be subject to Inheritance Tax in the event of your passing.

As all cryptocurrency is stored electronically in a digital wallet, it is important that the executors of your will have access to your login details to access your funds. There is no central ownership register, meaning that without these details, there will be no way to get access to your cryptoassets, and they will subsequently be lost to your heirs. It is also important that you leave letters granting permission for your executor to access your cryptocurrency and detailed instructions on how to do this.

The same IHT rules apply to cryptocurrency as with all other parts of a deceased’s estate. If someone were to leave their cryptoassets to a spouse, this would be exempt from IHT in the same way a physical estate would.

Leaving a digital inventory

Through a digital inventory, you can leave detailed instructions on how to access your cryptoassets, such as your private key. Without this, your cryptocurrency can’t be retrieved and will be lost forever. 

Wills

In your will, you should state how you would like your digital estate to be distributed. For example, you could state which accounts you would like to remain open or closed, and what you would like to leave to your heirs. It is vital for executors to have as much information as possible regarding your wishes. If you have any cryptoassets, it is also important that you include explicit authority for your executor to distribute these in alignment with your wishes.

If you have any questions on how owning cryptocurrency could affect your Inheritance Tax bill, one of our financial advisors at Thornton and Baines will be happy to help. Find us at: https://inheritance-tax.co.uk/

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