Crypto is 'property' for IHT purposes

Crypto is 'property' for IHT purposes
Photo: Dreamstime via Fotoware

Crypto assets will be considered as property for the purposes of inheritance tax, HM Revenue and Customs has confirmed.

In its latest updated guidance on the taxation of cryptoassets held by individuals, HMRC confirmed it would treat cryptoassets in the same way as it treats property for individuals who are domiciled or deemed domiciled for tax purposes.

But commentators have questioned the viability of this tax treatment, given that ownership of cryptoassets is not necessarily "tied to location" and regulators have "no agreement" on how to legislate.

Article continues after advert

Gregory Klumov, chief executive of Stasis, which issues euro-backed stablecoin, said: "Digital assets are treated as property only because global policymakers still have no agreement on how to legislatively segregate utility tokens and payment tokens, especially since one can morph into the other during its lifecycle."

He said: "Property has historically been tied to location and taxation has been easy. However, this is no longer the case after the advent of crypto.

"Your cryptocurrency property is yours until you remember your private key, regardless of your physical location. A simple solution could be to use stablecoins as an asset for pension contributions and the location of the issuing entity in property digestion."

The Revenue's guidance document on the taxation of crypto assets is ever-evolving as new policies develop and, with the Law Commission's recently published 549-page consultation for creating better rules around digital assets, commentators have welcomed the proposed clarity.

As reported by FTAdviser, the hope is these rules will set better tax and regulation around how crypto and digital assets are treated, with issuers calling for token classification.

This creates a two-tier tax economy, as the most popular stablecoins, such as USDC and EURS would be treated with tax relief as their issuers are located outside of the UK.

However, native blockchain tokens such as Bitcoin or Ethereum would continue to be fully taxed on inheritance and pension contributions unless HRMC introduces token classification, Klumov said.

Lack of legal precedent

The tax rules and other governances around crypto lack certainty and legal precedent - something which law firm CMS has pointed out in its latest updates.

The update's authors said that, in relation to IHT, there are no statutory rules to determine the situs or location of assets for inheritance tax purposes. Instead, the situs or location of assets is determined using general common law principles.

CMS stated: "In respect of exchange tokens specifically, where the cryptoassets are distinct from any underlying asset, HMRC has expressed its clear view on how situs should be determined.

"HMRC’s guidance confirms that, in its view, the situs of an exchange token should be determined by reference to the tax residency status of its beneficial owner.