A sudden death, a lost password and millions of dollars of cryptocurrency lost.
In 2018, the co-founder of a cryptocurrency exchange in Canada died suddenly, taking keys to an estimated $180 million in cryptocurrency assets to his grave. This cautionary tale highlights the importance of digital estate planning and ensuring that personal representatives can access public and private keys evidencing ownership of cryptocurrency. However, according to Law Society data, only 7% of existing Wills include mention of digital assets.
What is a digital asset?
A digital asset is a broad term and encompasses PayPal accounts, crypto tokens, nonfungible tokens (NFTs) and digital carbon credits. It can even include other items of value such as manuscripts and photographs. While ownership of such assets is increasingly common, it seems they are not treated in the same way as physical assets when it comes to estate planning.
Situs of digital assets for tax and succession purposes
The situs of digital assets impacts the tax and succession position but there is ambiguity around where digital assets are situated for tax and succession purposes due to the lack of legislation and guidance in this area. For UK tax purposes, certain assets which have no physical existence have been ascribed rules regarding situs by HMRC and UK courts. Examples include:
- Intellectual property and copyright – a trademark is situated where it is registered, and according to case law the same rule appears to apply to patents and licences; and
- Crypto assets (at present limited to 'exchange tokens' such as Bitcoin) – HMRC has provided a clear rule that crypto assets are treated as being located in the jurisdiction in which the owner is resident. This means that UK resident, non-UK domiciled individuals will pay UK tax on all crypto assets they hold. This is not based on legislation, it is merely HMRC’s understanding of how existing tax laws would apply to this emerging class of assets.
HMRC has acknowledged that NFTs, which can be associated with a particular digital or physical asset, are regarded as a separate entity to crypto assets, but the UK currently has no legislation or guidance relating to the situs of NFTs. It may be expected that, for tax purposes, the treatment of NFTs is to be similar to crypto assets, although HMRC is yet to comment on this.
Ownership and digital assets classed as ‘property’
There are considerable identification and ownership issues for digital assets because there is no register of ownership or document to evidence title, as is the case for land or shares.
HMRC take the view that the owner of crypto is the holder of the digital keys. The UK government introduced the Property (Digital Assets etc) Bill in September 2024, which legislates for a new category of personal “property”. Currently, personal property falls into two distinct categories – things in possession and things in action but the Law Commission’s view is that neither accommodates digital assets. The Property (Digital Assets etc) Bill would introduce a third category making clear that digital assets confer proprietary rights akin to other assets. If digital assets are recognised as personal property in the UK, they can be left to a beneficiary under a Will or intestacy.
Ensure your personal representatives can access your digital assets
Digital assets can have monetary value or sentimental value and it is important to ensure that this is protected. Although this is an area which is rapidly evolving, we suggest taking the following practical steps to ensure that personal representatives can access and deal with your digital assets:
- Identify all digital assets and create a digital inventory of online accounts and include details of third-party providers who hold crypto.
- Use an online password manager site to store your passwords and keys to access wallets securely in a ‘vault’ which can be accessed using a master password.
- Although there is some debate as to whether making log-in and password details available to personal representatives during an account holder’s lifetime would breach the standard terms of internet service providers, it may be considered prudent to put measures in place to ensure personal representatives are not barred from accessing online accounts. Standard terms and conditions may prohibit account holders from recording details of their logins and passwords and sharing this information for privacy and security reasons. This is not an established area and so to avoid breaches of terms, using a master password to a ‘vault’ which stores specific passwords and login details is more likely to ensure terms are not breached.
- Ensuring your executor knows how to access crypto assets quickly is important considering the volatility in the market and potentially the need to act swiftly in an ever-changing market conditions.
- The inventory should not be included in a Will because this becomes a public document after death. Instead, include information as to where to find the inventory and how you would like your digital estate to be administered in an accompanying letter of wishes, which can be stored with the Will but kept private.
Crypto – estate tax
For inheritance tax purposes, HMRC has confirmed that crypto assets will be considered property and will treat these assets in the same way as it treats property for domiciled and deemed domiciled individuals. This means that crypto assets form part of an individual’s estate and inheritance tax may be payable on death. It also means that gifts of crypto during an individual’s lifetime could result in inheritance tax being payable if the donor dies within 7 years of making the gift and gifts into trust may also result in inheritance tax being payable.
If you have any questions about points raised in this article, please contact Jonathan Riley and Priya Morzeria.
