Crypto Inheritance UK: What Happens to Bitcoin When Someone Dies?

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Table of Contents

• Crypto Inheritance And Inheritance Planning
• Is Bitcoin And Crypto Part Of An Estate In The UK?
• The Biggest Problem: Accessing The Cryptocurrency
• How Executors Access A Deceased’s Cryptocurrency
• Assets On Crypto Exchanges
• Self-Custody Cryptocurrency Wallets
• Does Inheritance Tax Apply To Bitcoin?
• What About Capital Gains Tax?
• Should Bitcoin Be Mentioned In A Will?
• What Happens If There Is No Will?
• How To Protect Your Family From Losing Your Bitcoin
• Seek Specialist Advice

Crypto Inheritance And Inheritance Planning

Millions of people in the UK now hold Bitcoin and other cryptocurrencies. While investors focus on asset performance, tax issues and the security of their coins they often overlook one critical question: what happens to Bitcoin when the owner dies?

Unlike the cash you hold in a bank account, your investment portfolio or pension, cryptocurrency is often controlled through private keys, recovery phrases and passwords, especially if the owner has moved it off the exchange they bought it on and secured it on a crypto hardware wallet.

This creates unique challenges for executors, beneficiaries and family members who are tasked with securing the estate’s assets and distributing them according to a Will. If a clear plan hasn’t been put in place or the credentials are lost, the assets may become permanently inaccessible.

As crypto ownership continues to grow across the UK, inheritance planning has become an important, yet often overlooked, aspect of digital asset ownership and should be included in a any succession plan.

Is Bitcoin And Crypto Part Of An Estate In The UK?

Yes. Under UK law cryptocurrency is treated as property and forms part of a deceased person’s estate.

This means that Bitcoin, Ethereum, XRP, stablecoins like USDT Tether, NFTs and other digital assets must be valued and reported to HMRC as part of the probate process, alongside traditional assets such property, shares, cash and other investments when administering an estate.

For executors, who are often family members dealing with grief, this creates both legal responsibilities and practical challenges when it comes to identifying and valuing the deceased’s crypto holdings.

Not only will the assets have to be found, but the executor must also value and report them as part of the inheritance tax process and secure access to the assets in order to release the funds and distribute them as per the deceased’s wishes after securing a Grant of Probate.

The Biggest Problem: Accessing The Cryptocurrency

One of the greatest challenges facing executors is access, especially if the deceased secured their assets on a decentralised wallet, such as a hardware wallet or app.

Unlike traditional bank or investment accounts there is no central authority to go to for help or reset forgotten passwords or lost credentials. Instead, access depends entirely on access codes, private keys and seed phrases.

Moving cryptocurrencies from a hardware wallet in order to sell them needs to be done carefully and securely to avoid mistakes and potentially losing the coins forever. It also requires a certain degree of technical knowledge and an understanding of how to conduct on-chain transactions.

If these credentials are lost or nobody knows how to use the hardware wallet or app, the assets may be lost forever, although they never actually go anywhere, rather they remain on the blockchain.

This creates a unique situation where beneficiaries may legally inherit cryptocurrency but are unable to access it or transfer the funds.

Many online discussions among crypto users highlight the issue of families discovering a hardware wallet after a death but have no knowledge of the login information or seed phrase required to access it, or the practical skills to do so.

How Executors Access A Deceased’s Cryptocurrency

This all depends on how the deceased stored their Bitcoin and other tokens, which will usually be on either a cryptocurrency exchange or a self-custody wallet.

Assets On Cryptocurrency Exchanges

If their crypto portfolio is held on a regulated cryptocurrency exchange, such as Coinbase or Kraken, the process is relatively straightforward and follows a similar path to accessing funds held in a bank account.

Executors can usually begin a formal claims process by:

• Notifying the platform of the account holder’s death
• Providing a copy of the death certificate
• Providing proof of the executor’s identity
• Sending a copy of the Grant of Probate or Letters of Administration (usually issued when a person has died intestate, i.e. without a valid Will, there is a Will but it’s deemed invalid by the court or there is no named executor).
• Evidence that they have the authority to act as an executor on behalf of the estate

Once these documents have been provided and the executor is verified the exchange should transfer the assets according to the estate administration process they follow.

Like other regulated financial institutions, major exchanges have a dedicated procedure to follow for deceased account holders, although the process can take some time so be prepared to be patient.

It’s vital that you ensure you have the legal authority to access any crypto accounts otherwise you could be in breach of the Computer Misuse Act 1990.

Self-Custody Cryptocurrency Wallets

This is where the process can get particularly tricky and present a much greater challenge for executors.

When Bitcoin or other cryptocurrencies are held in a hardware wallet, software wallet or another form of cold-storage, decentralised arrangement, access to them depends entirely on passwords and seed phrases/private keys.

Without this information there is no recovery mechanism available and no support desk to seek help from.

This is why professional estate planners are increasingly recommending that people with digital assets maintain a secure inventory of their holdings together with access instructions in a document that’s separate from their Will, such as a letter of wishes.

Remember, if a Grant of Probate is issued for a Will it becomes a public document which anyone can inspect. This is why you should never include any wallet access instructions here as anyone with the seed phrase to a wallet can potentially steal its contents.

Whichever method the deceased has used to store their digital assets, securing and accurately valuing them are among the key responsibilities of a cryptocurrency executor.

Secure seed phrase storage is a whole other topic on its own, but in short you should always store your seed phrase offline and hidden away from prying eyes. Some people write it on a piece of paper, but this is easily lost or damaged.

A more secure method is to use a metal plate which is then physically stamped with the seed phrase then hidden away. Metal storage solutions are widely available online and are relatively cheap. It’s important to tell your executors where the plate is stored in the event that they need the seed phrase to recover a wallet.

Does Inheritance Tax Apply To Bitcoin?

Yes. HMRC treats cryptocurrency as property for inheritance tax (IHT) purposes and it’s included in the deceased estate as such.

Executors must determine the market value of the cryptoassets on the date of the holder’s death and include this in the tax submission to HMRC when calculating the total value of an estate.

One situation where tax may not be payable is if the total value of the estate falls within the nil rate band, i.e. the amount of tax-free allowance an individual is allowed to pass on without paying any tax on it.

Another is if there are any transferable allowances that can be used, or if the assets are passing to a spouse or civil partner.

With forethought and careful planning there are ways to significantly reduce your inheritance liability by making use of the various gifts and allowances offered by HMRC.

One particularly challenging financial complication that can arise is when an estate owes tax on cryptocurrency that beneficiaries cannot access which is another reason why careful planning is essential.

What About Capital Gains Tax?

People who inherit Bitcoin or other cryptocurrencies don’t immediately face a Capital Gains Tax (CGT) liability simply because they receive it as this is generally not treated as a disposal event.

This changes if the beneficiary later sells the Bitcoin and it has increased in value from the market price on the date of the original holder’s death. In this situation, CGT may apply to the gain made after inheritance.

This emphasises the need to maintain accurate valuation records for both inheritance tax reporting and reporting potential future gains to fulfil tax liabilities.

Should Bitcoin Be Mentioned In A Will?

As I’ve already touched on, a Will can potentially become a public document so you should never include the private key or seed phrase to your wallet in this document.

Instead, you can reference your digital assets in your Will and supply the private access information in a separate document (i.e. a letter of wishes, also known as a memorandum of wishes) that will never be made public and is only available to people you trust implicitly.

You should explain to your executor(s) the process of accessing your hardware or software wallet as many people are unfamiliar with how the technology works.

The thought of making a mistake or losing the money to a scam can be particularly daunting, especially while dealing with the death of a loved one as well.

What Happens If There Is No Will?

If someone who holds Bitcoin dies without making a valid Will, their cryptocurrency does not disappear.

Instead, it is distributed according to the UK’s intestacy rules, just like any other asset. This is a fixed legal order set out by the state which allocates beneficiaries according to whether the deceased had a surviving spouse or civil partner, children or grandchildren, aunts or uncles or other half-blood relations.

If there are no known relatives the estate will go to the Crown under a rule called bona vacantia. The Crown will then conduct an investigation using genealogists to try to trace any relatives.

If no heirs are found, the assets will ultimately be absorbed into public funds managed by the Crown, but if heirs do come forward even years into the future they can often claim the estate back.

However, in the case of digital assets, if no-one is aware that they exist there’s a risk that the funds will never be passed on even if a living relative can be located.

How To Protect Your Family From Losing Your Bitcoin

Like many things in life, proper planning is crucial and this is required to secure your digital assets for future generations.

Detailing your holdings and how to access them is the most important step, followed by ensuring you have a tech-savvy executor who’s capable of following the correct procedure to securely access and distribute your coins according to your wishes.

Here’s a checklist of the steps you should take as part of  your estate planning:

• Document your wallet location and any exchange accounts.
• Create a detailed set of instructions as to how to access and use the wallet.
• Make a note of your seed phrase and login details and tell your executor where this is stored. Keep it in a safe place that’s offline.
• Maintain a record of the holdings you have and their approximate value, updated every few months or when your portfolio changes.
• Keep your will up-to-date, but don’t include sensitive information about your digital assets in the main document.

Seek Specialist Advice

As cryptocurrency increasingly becomes a component of personal wealth more executors will face the prospect of distributing digital assets to beneficiaries.

For Bitcoin investors, inheritance planning is no longer an option. Without preparation their accumulated digital wealth could be lost forever which could become even more significant in the future if prices rise.

Solicitors and tax advisers can help ensure you handle digital assets left in a Will in a tax-compliant way in accordance with the law.

If you need help and advice on using hardware or software wallets, transferring Bitcoin safely or any other technical aspect of cryptocurrency usage then The Crypto Adviser can help, so please contact us today.