What is Cryptocurrency and How Will it Impact IHT?

According to the Financial Conduct Authority (FCA), some 2.3 million people in the UK are now thought to own a crypto token or asset of some description.

Despite its inherent volatility, this type of asset is highly accessible and increasingly able to be used across a broad range of applications, which is proving highly disruptive in a number of different marketplaces.

But what do we mean by cryptocurrency, and how will this impact the management and payment of inheritance tax (IHT) in the UK? 

What is Cryptocurrency?

In simple terms, crypto assets are digital or virtual currencies that are secured by cryptography, making them highly secure and almost impossible to double-spend.

In order to help drive anonymity and optimize financial inclusion, fungible crypto assets are also built into decentralized blockchain networks. 

This means that they leverage a distributed ledger that’s enforced by a disparate network of global computers, creating a completely transparent asset class that’s largely impervious to manipulation.

Perhaps the best-known crypto asset in Bitcoin (BTC), which blazed a trail for all other tokens to follow in 2009. This is built on the blockchain and provides a secure and digital way of making payments online, while the market has since evolved to include a broader range of assets and so-called “stablecoins” (which are pegged to fiat currencies). 

Crypto in the Eyes of HMRC

In the eyes of HMRC (which oversees the payment of inheritance and its associated tax levies), cryptocurrencies are viewed as property.

This means that any crypto holdings will form part of an individual’s taxable estate following their death, with IHT applied and payable so long as the total value of the estate exceeds £325,000.

If crypto holdings do tip the value of your loved one’s estate over the £325,000 threshold, they’ll be required to pay IHT at a levy of 40%. 

This levy must be settled before beneficiaries can receive their payments or allocated assets, and you may have to take out an executor’s loan to accomplish this and facilitate a quick and efficient settlement. 

Factoring Crypto into Your Will

Interestingly, a recent survey from the UK’s Law Society found that 93% of people who have a last will and testament haven’t made any provision for crypto assets or tokens like BTC.

This highlights a significant oversight among UK citizens and one that will need to be addressed if you want to manage your estate successfully prior to your debt.

Given this and the seemingly permanent rise to prominence of crypto as a tangible asset class on these shores, it’s crucial that you start factoring crypto holdings into your financial planning and organization.

Most crucially, you’ll need to ensure that any executor appointed to look after your estate in the wake of your death is aware of your crypto holdings and their value, along with the precise address of the wallet that they’re held in.

You’ll definitely have to record the accurate value of such assets at the time of writing, even though this is likely to fluctuate in line with wider market trends over time.

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