Crypto-assets held by individuals: inheritance tax relief and pensions

HM Revenue & Customs (“HMRC”) continues to update and expand its guidance on the taxation of crypto-assets held by individuals. In this series, we will explore various tax topics relevant to individuals buying, holding and disposing of crypto-assets.

Inheritance tax

Inheritance tax is generally levied on the deemed transfer of value that takes place on the death of an individual. It can also occur as a result of certain lifetime transactions.

In its guidance, HMRC confirmed that it considers crypto-assets to be property for inheritance tax purposes.

Individuals domiciled in the UK or deemed to be domiciled for tax purposes are subject to UK inheritance tax on their worldwide estates. Individuals who are not domiciled in the UK are, subject to certain exceptions, only liable to UK inheritance tax in respect of assets they hold which are situated in the UK (this is i.e. assets located in the UK).

There are no statutory rules for determining the situs or location of assets for estate tax purposes. Instead, the situs or location of property is determined using general common law principles.

With specific regard to exchange tokens, where crypto-assets are distinct from any underlying asset, HMRC has expressed its clear view on how situs should be determined. The HMRC 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, for the following reasons:

  • exchange tokens have economic value because these assets can be “taken advantage of”, for example, by exchanging the crypto-assets for goods, services, fiat currency or other tokens;
  • exchange tokens are a new type of intangible asset (which are different from other types of intangible assets, such as stocks or debentures); and
  • the only identifiable party to consider is the beneficial owner of an exchange token.

This approach marks a departure from general common law principles and is not supported by legal precedent or legislative authority. It follows that if the question of the situs or whereabouts of exchange tokens were to be asked in court, it may well be answered differently.

It is also unclear how the situs or location of other types of crypto-assets will be determined.

Tax relief on pension contributions

Subject to certain limits, income tax relief is available to members in respect of member contributions paid to registered pension plans.

Since HMRC does not consider crypto-assets as currency or cash, if the crypto-assets were paid into a registered pension scheme, these contributions would not result in any income tax relief.

If an individual nevertheless contributes crypto-assets to a registered pension plan, albeit without any tax benefit, those crypto-assets would be part of the plan assets that are subject to the tax rules governing registered pension plans.

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