Implications of cryptocurrency on IHT
Cryptocurrency has created many new considerations and challenges for the financial world, and it seems to be continuing to shake things up as HMRC now consider cryptocurrencies to be an IHT liability.
So what is cryptocurrency?
A cryptocurrency is a digital currency that can be used to buy goods and services. However, they rely on digital ledger (a blockchain) and cryptography to verify transactions as opposed to a third party such as a banking or credit service. This means that the transactions carried out using cryptocurrencies aren’t controlled by a single organisation.
This “decentralised ownership” of transactions is the main challenge that cryptocurrencies present. This means only the owner of the cryptocurrency can see what they own, their value and what transactions they are carrying out. When it comes to understanding the assets that an individual owns, this presents a real challenge.
Issues in relation to Cryptocurrencies
There are several legal issues in relation to cryptocurrencies that arise when considering IHT. These include:
- where are the assets domiciled for tax purposes?
- what is the value of the assets when calculating IHT?
- what happens if the value changes between death and liquidation?
HMRC continues to wrestle with these issues as the law around cryptocurrencies catches up with the marketplace.
HMRC currently state that the assets are domiciled in the same legal jurisdiction as the deceased for tax purposes.
Although the value of cryptocurrencies (at death) is considered “property” for the purposes of calculating Inheritance Tax, some of the “true-ups” available on real-estate are not available on cryptocurrencies. This can cause issues for Executors as the market for cryptocurrencies still is highly volatile.
Commentators have already pointed out the possibility that executors could be criticised by beneficiaries if they do not dispose of these assets quickly, avoiding any unnecessary change in value. As well as the administrative challenges of dealing with probate, cryptocurrencies also have their own difficulties regarding encashment (e.g., finding the relevant keys to access the assets). HMRC’s 549-page consultation document has gone some way to clarifying the rules and has been welcomed.
Jim Sisson Finance Director at Tower Street Finance said: “Gaining an accurate understanding of an individual’s assets is a fundamental part of the probate and estate administration process. This emphasises the need for people to talk about their assets and consider the implications in the event of an IHT liability. As crypto becomes more prevalent, it is important the probate industry understands how best to deal with these assets in a legal and compliant manner.
“Current guidance from commentators suggest Executors should seek to encash these assets as quickly as possible to avoid any complaints from Beneficiaries. Of course, any such transaction should probably occur after Grant is received, and therefore paying IHT and obtaining Grant in good order is critical.
Our IHT Loan product can accommodate various financial assets, and we continue to explore this developing world of cryptocurrencies to see how we can help even more people settle IHT liabilities or access their inheritance as quickly as possible.”
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