Cryptoassets held by individuals: Inheritance tax and pensions tax relief

United Kingdom

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

Inheritance Tax

Inheritance tax typically arises on the deemed transfer of value that takes place on the death of an individual. It can also arise as a consequence of certain lifetime transactions.

In its guidance, HMRC has confirmed that it considers cryptoassets to be property for the purposes of inheritance tax.

Individuals who are UK domiciled or deemed domiciled for tax purposes are subject to UK inheritance tax on their worldwide estates. Non-UK domiciled individuals are, subject to certain exceptions, only subject to UK inheritance tax in respect of any assets they hold which are situated in the UK (ie UK situs assets).

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

In respect of exchange tokens specifically, where the cryptoassets are distinct from any underlying asset, HMRC has expressed its clear view on how situs should be determined. HMRC’s 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 an economic value as such assets can be “turned to account”, for example, by exchanging the cryptoassets for goods, services, fiat currency or other tokens;
  • exchange tokens are a new type of intangible asset (which are different to other types of intangible assets, such as shares 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 unsupported by legal precedent or legislative authority. It follows that should the question of the situs or location of exchange tokens be put before the courts, it may well be answered differently.

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

Tax Relief on Making Pension Contributions

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

On the basis that HMRC does not consider cryptoassets to be currency or money, should cryptoassets be paid into a registered pension scheme, such contributions would not attract any income tax relief.

If an individual nevertheless contributes cryptoassets into a registered pension scheme, albeit without any income tax advantages, such cryptoassets would become part of the scheme assets which are subject to the tax rules governing registered pension schemes.