Cryptocurrency – succession and inheritance tax

Cryptocurrency is treated as an asset of the deceased’s estate, so the first step in planning is to make clear in your Will what should happen to your holding on your death; whether that be gifting it to a named individual or leaving it to form part of your residuary estate.  It is often wrongly assumed that digital assets are ‘personal possessions’ for the purposes of your Will but most standard personal possessions clauses would not automatically include them and will need to be tailored if this is your wish.

There are a few ways that crypto investors can plan for the practicalities of passing their holding on, when their estate is administered.

The first option is for the crypto investor to register an account with one of the tier 1 crypto exchanges.  When the investor dies, their executor must contact the exchange and should be able to deal with the currency on provision of the usual documents that would be required by a traditional financial institution (death certificate, grant of probate, executor ID etc).

A risk to using an exchange is that there have been occasions when they have been hacked or have folded.  It is therefore not a fool proof way of ensuring that your currency is passed on.

An alternative is to use a non-custodial wallet to store the funds.  Until recently, the only way to pass down decentralised crypto assets was for the holder to share the private key (password-like coding) with their heirs.  There is however a new offering on the market from a company called Serenity Shield.  Users can create an inheritance strongbox, whereby their encrypted account information is divided into 3 fragments, with one being held by the account holder, one provided to the beneficiary and the final one being held by Serenity.  The user then provides instruction on their account in what circumstances Serenity should share the private key.

Inheritance tax

Cryptocurrencies are considered by HMRC to be property for inheritance tax (IHT) purposes and will form part of an individual’s taxable estate on death.

Cryptocurrency is volatile and its value can change dramatically overnight.  Executors may therefore wonder, when preparing the inheritance tax account for the estate whether any reliefs are available if the value drops dramatically after death.  Unfortunately, there is currently no remedy in this situation, as the usual loss on sale relief that allows executors to reclaim some of the IHT when there has been a decrease in value of property or quoted shares, does not apply to cryptocurrency.

Due to this volatility, to avoid potential criticism from beneficiaries, executors ought to seek financial advice as soon as possible after the testator’s death, regarding sale of the cryptocurrency.  Executors have a duty to obtain the best price possible for assets and it may be prudent for them to sell up as soon as possible, to avoid any unanticipated drop in value.

If you hold digital assets (cryptocurrency or otherwise) and aren’t sure what will happen to them on your death, please get in touch with your usual team member for advice.