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Inheritance Tax Could Still Be Due On Inaccessible Cryptocurrency
Inheritance Tax (IHT) is already one of the most hated taxes there is in the UK, but now there’s another reason to dislike it.
Beneficiaries of a Will that contains cryptocurrency or NFTs (Non-Fungible Tokens) which have become inaccessible due to lost keys may still have to pay tax on it.
You read that right – if a family member builds up a crypto portfolio but fails to pass on the information needed to access it they could be leaving bereaved relatives facing an extra IHT bill even though they can’t benefit from the assets.
This would be charged based on the value of the crypto when the holder dies and becomes payable if the total value of the person’s estate breaches the tax free IHT threshold (currently £325,000 excluding property).
How much is IHT on ‘lost’ cryptoassets?
For example, if someone holds £50,000 worth of crypto in a wallet that no-one can access, the beneficiaries could be forced to pay an extra £20,000 on the overall IHT bill on the lost assets.
This levy, highlighted by the Daily Telegraph is another example of how HMRC has yet to fully integrate cryptocurrency into the tax system.
It also underscores the need to have plan in place for passing on your digital assets when you die.
Dozens of MPs are calling for the charge to be scrapped, especially as some 10 % of the UK population now owns cryptocurrency.
Self-custody Means Crypto Can Be Lost
Anyone who buys cryptocurrency and removes it from the central exchange where they bought it and places it in self-custody on a hardware or software wallet for safekeeping becomes the sole custodian of those assets.
When you set up an account on a crypto exchange like Coinbase or Binance the company holds your private crypto keys.
While this may give you peace of mind knowing there’s someone to turn to if you lose access to their account, many in the crypto sector advocate self-custody as the only way to truly keep your crypto safe.
Putting it on a self-custody hardware or software wallet places it out of the reach of hackers who target centralised exchanges. It also means your coins will be safe if an exchange collapses, as seen by the implosion of FTX in 2022.
Crypto seed phrase is the key to your assets
When you set up a self-custody wallet you’re given a seed phrase – a series of 12, 18 or 24 words which can be used to retrieve your assets if you lose access to the wallet.
However, if you lose this seed phrase your coins are lost forever and there’s no-one to turn to for help.
Also, if some steals this passphrase they can potentially access your crypto portfolio and move all your assets to wallets controlled by them.
Passing on your cryptoassets when you die
That’s why it’s important for anyone who holds cryptocurrency in a self-custody wallet to have a procedure in place to pass on their assets in a secure manner when they die.
This might include selecting an executor who has the technical know-how, or ability to learn, to grasp the process involved in accessing a self-custody wallet, retrieving the coins and either selling them or distributing them according to the wishes of the deceased.
This should be someone to trust implicitly as you’re potentially giving them instant access to your entire crypto portfolio.
You should also keep your seed phrase secure, but again you should let someone you trust know its whereabouts in case you die unexpectedly.
Keep your private crypto key out of your Will
You should never include your seed phrase or details about your crypto assets in your actual Will as it will become a public document if probate is required and a Grant of Probate is issued.
This means that anyone could see the contents and access your portfolio if you included your seed phrase within the document.
If you hold crypto you should talk to your loved ones and beneficiaries so they’re primed to know what to do and have the necessary information to access your crypto in the event that you die suddenly.
By doing so you’ll avoid leaving them with a painful bill for crypto assets that they cannot even access and are effectively lost forever.
If you need advice and help navigating the world of crypto and avoiding scams, then check out the services we offer.
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Disclaimer: Nothing on this website constitutes financial advice. The information provided is for educational purposes only.
