Decoding the enigma – Key points on Cryptocurrency and Inheritance
There is currently limited regulation in relation to cryptocurrency which makes this an area where investors and executors alike must tread carefully. Below are some key points to consider when dealing with cryptocurrency and inheritance.
As of December 2018, HMRC views cryptocurrency as ‘property’ for Inheritance Tax purposes. This means executors will have to establish and declare crypto assets on the deceased’s tax return.
A secure virtual wallet is needed to store, send, and receive cryptocurrency. The wallet holds the private keys and without a key, the assets are lost forever and cannot pass to beneficiaries.
A cautionary tale comes from Canada in which around £150 million in cryptocurrency was lost as the wallets could not be accessed following the sudden death of crypto magnate Gerald Cotton. Whilst this case was an extreme one, the principle isn’t, and this could equally happen to Granny Smith who has £2,000 of Crypto.
There are currently several categories of wallets:
- Firstly a hot wallet, where the private key is held online.
- Secondly, a cold wallet, which is essentially offline. Examples include an offline computer, notebook, or USB stick.
- Thirdly a custodial wallet or account, which is hosted by a third party platform. In this instance the customer will likely have had to consent to the terms of business of the provider and specific authority may well be needed on behalf of any Executor or Attorney.
Should the crypto owner lose mental capacity or pass away, it is vital that they leave, in advance, clear directions on how to unlock their computer and hot or cold wallet.
Considerations for holders and executors
Crypto and digital property more generally does not rest with the deceased’s Executors and Trustees if they cannot be found and retrieved. Therefore it is essential to keep a secure inventory of all assets, passwords, etc. Otherwise, there is a very real risk they may be lost forever.
Once the cryptocurrency has been identified, it is important that the Executors take ownership. A Grant of Probate is currently not always required. However, it is vital that Executors make sure the deceased actually owned them. Personal representatives must check for evidence of purchase and declare the holding or holdings on the deceased’s Inheritance Tax return.
With regards to the passing of assets, if the executors/trustees have the public and private keys to access the cryptocurrency, they ultimately have control of the wallet. No death certificate or Grant of Probate is likely to be needed. It is certainly worth considering taking advice from a suitable investment adviser before selling or transferring directly to Beneficiaries.
Furthermore, executors would be well advised to take advice on non-UK-based exchanges to see if they are subject to Inheritance Tax.
In terms of taxation, Inheritance Tax will need to be considered on the death of the holder and Capital Gains Tax on disposal. It is essential that Executors take advice, obtain the correct valuations, fully declare the holdings, and pay all tax due to avoid any costly interest and or penalties.
- Fully identify your cryptocurrency assets.
- Produce a secure digital inventory and revise regularly.
- Put in place a Lasting Power of Attorney and ensure it contains an explicit authority for the Attorney/s to deal with your crypto assets.
- Have a tailored Will and letter of wishes. This should be reviewed regularly.
- Trusts – consider the use of them to manage your holdings going forward.
Whilst this may all seem daunting for an Executor, Attorney, or Trustee, it need not be, provided expert advice is taken at the earliest possible opportunity.
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