Can I pay less inheritance tax on cryptocurrencies?
"My partner passed away last year and left me his portfolio which consists primarily of cryptocurrencies. I’m about to pay my IHT bill but I’m concerned about the fluctuating value of my holdings. Those investments are worth considerably less now than when the estate was valued for IHT purposes. Do I still need to pay the same amount of inheritance tax or would HMRC take into account the drop in value of those assets?"
This is a topical question given the price volatility of bitcoin and other cryptocurrency over recent weeks alone. The price of bitcoin has fallen to around £20,000 in recent days, wiping out the huge gains that had been made earlier in the year. It was only in April of this year when it reached its peak of almost £50,000.
Cryptocurrencies like bitcoin are considered by HMRC to be property for inheritance tax (“IHT”) purposes which means they form part of your partner’s taxable estate on death.
Tax is only due if your partners estate exceeds £325,000 in total. Tax on value above that level is subject to IHT at 40%, unless a relief or exemption applies.
I do not know if you were married to your partner, because one of the most valuable IHT exemptions is the spouse exemption. Assets (including crypto assets) left to a spouse will benefit from 100% IHT relief (provided the surviving spouse is UK domiciled). If you were not married (or in a civil partnership) the exemption will not apply. IHT is calculated on the value of the assets immediately before death.
There are IHT reliefs available to executors where assets have fallen in value between the date of death and the asset is sold. This relief means that executors can reclaim some of the IHT if the value has fallen since death. However, I am afraid that this loss on sale relief does not apply to cryptocurrency, as it broadly applies only to land or quoted shares provided certain conditions are met.
The rules might be updated in future, but for now I am afraid there is no relief for the fall in value of cryptocurrency after death.
This leaves executors in a difficult position and in theory could result in the tax being higher than the value of the bitcoin if there are further falls. Executors have a duty to obtain the best price reasonably possible for assets and so it is better for executors to sell risky and volatile assets after death to avoid these risks. There could be a risk that the beneficiaries of your partner’s estate might criticise the executors if they have not taken steps to sell high risk assets. Executors and trustees have wide investment powers and are generally not liable for loss provided there is no breach, but they should consider obtaining proper investment advice.
Of course one of the other challenges that executors face when dealing with cryptocurrency is proving ownership and obtaining access to the funds. Many people hold their cryptocurrency in virtual wallets that require 16-digit private keys to access them and so it is important that anyone with such assets ensures their executors can access the funds, given there is no central ownership register.
This Q&A piece was first published in the Financial Times on 15th July 2021.