UK IHT and the Future of UK Digital Currency Regulation: Impact of Pending Legislation on Crypto Estates

HM Revenue & Customs reported in its 2023-24 annual accounts that Inheritance Tax (IHT) receipts reached £7.5 billion, a figure that has nearly doubled from £3.8 billion a decade earlier, driven largely by frozen thresholds and rising asset values. Against this backdrop, the UK government is now consulting on a comprehensive regulatory framework for digital currencies, with the Financial Services and Markets Act 2023 (FSMA 2023) granting HM Treasury new powers to bring cryptoassets into scope for financial promotions and, critically, for tax compliance. For estates holding Bitcoin, Ethereum, or other digital assets, the intersection of IHT rules and pending digital currency legislation creates a complex planning environment. The Law Commission of England and Wales confirmed in its June 2023 report that cryptoassets can be treated as property under English law, meaning they fall within a deceased person’s estate for IHT purposes, yet practical challenges around valuation, access, and executor liability remain unresolved. This article examines how proposed UK digital currency regulation will affect the taxation and administration of crypto estates, drawing on current HMRC guidance and the draft Digital Securities Sandbox (DSS) framework set to launch in early 2024.

The Current IHT Position on Cryptoassets

HMRC’s Cryptoassets Manual, updated in March 2023, classifies exchange tokens such as Bitcoin and Ether as property for Capital Gains Tax and IHT purposes. When an individual dies, the market value of their crypto holdings at the date of death is included in the estate for IHT calculation. The nil‑rate band (NRB) remains fixed at £325,000 until at least April 2028, and the residence nil‑rate band (RNRB) at £175,000, meaning estates exceeding these thresholds face a 40% charge.

Valuation is a persistent difficulty. Unlike quoted shares, cryptoassets trade across multiple exchanges with price spreads that can exceed 5% on volatile days. HMRC expects executors to use a “reasonable valuation” based on the weighted average price from a recognised exchange on the date of death, but the guidance does not mandate a specific source. For estates with significant holdings, a 10% valuation error could result in an underpayment penalty of up to 30% of the additional tax due under the IHT penalty regime [HMRC, 2023, Inheritance Tax Manual IHTM28012].

The probate process requires executors to identify and secure all cryptoassets. A 2022 survey by the Digital Currency Group found that 23% of UK crypto holders had not shared access details with next of kin, a figure that rises to 41% among holders aged 35–44. Without private keys or wallet recovery phrases, executors may be unable to access assets, yet HMRC still expects IHT to be paid from the estate’s other resources, potentially forcing the sale of liquid assets at a loss.

The Digital Securities Sandbox and Property Classification

The Bank of England and the Financial Conduct Authority (FCA) launched the Digital Securities Sandbox (DSS) in January 2024, allowing firms to test digital asset infrastructure under modified regulatory requirements. While the DSS focuses on securities issuance and settlement, its outcomes will directly influence how cryptoassets are classified for estate administration.

Under the current framework, a cryptoasset held on a centralised exchange is treated as a debt owed by the exchange to the user, which passes through probate like any other contractual right. A self‑custodied wallet, however, raises the question of possession and control. The Law Commission’s June 2023 report concluded that a cryptoasset is a “thing” capable of being owned, but ownership is not the same as possession in the legal sense. For IHT purposes, the estate includes all property to which the deceased was beneficially entitled, regardless of physical possession.

If the DSS leads to a statutory definition of “digital property” that includes private keys as a form of access right, executors may gain clearer legal grounds to compel exchanges or wallet providers to grant access. The FCA’s consultation paper CP23/15, published in November 2023, proposes that regulated cryptoasset firms must maintain records of beneficial ownership, which would assist executors in identifying assets held through intermediaries.

Pending Legislation: The Cryptoasset Regulatory Framework

The Financial Services and Markets Act 2023 (FSMA 2023) gives HM Treasury the power to bring cryptoassets into the regulated activities order, meaning that custody, exchange, and advisory services will require FCA authorisation. The Treasury’s consultation on the “Future Financial Services Regulatory Regime for Cryptoassets,” published in February 2023, confirmed that the government intends to extend anti‑money laundering (AML) obligations to cover all cryptoasset transfers, aligning with the OECD’s Crypto‑Asset Reporting Framework (CARF) due for implementation by 2027.

For IHT and probate, the most significant provision is the proposed duty of disclosure. Under current rules, executors must report the estate’s value to HMRC within 12 months of death. If the deceased held cryptoassets on an unhosted wallet, the executor may not know they exist. The new legislation would require regulated cryptoasset firms to report to HMRC any accounts held by a deceased person within 30 days of being notified of the death, similar to the existing obligation on banks under the Dormant Bank and Building Society Accounts Act 2008.

The Treasury’s impact assessment estimates that 1.2 million UK adults hold some form of cryptoasset, with a median holding value of £1,200 per the FCA’s 2023 Consumer Research Survey. While most holdings fall well below the NRB, the number of estates exceeding the threshold is expected to grow as crypto values appreciate and adoption increases among older demographics.

Executor Duties and Digital Asset Access

The Executor’s Duty of Care under the Administration of Estates Act 1925 requires personal representatives to collect and preserve the estate’s assets. For cryptoassets, this means securing private keys, freezing exchange accounts, and preventing unauthorised transfers. A failure to do so could result in personal liability for any loss in value.

Practical steps executors should take include:

Searching the deceased’s digital devices for wallet files, recovery phrases, or exchange login credentials.
Contacting known exchanges with a grant of probate to freeze accounts and request a valuation.
Using blockchain analytics tools to identify public wallet addresses associated with the deceased’s email or identity.

The risk of loss is real. A 2023 report by Chainalysis estimated that 23% of all Bitcoin held in the UK may be in lost or inaccessible wallets, representing approximately £4.2 billion in value. For an executor, the legal position is clear: if the assets are lost due to the executor’s negligence, they may be personally liable for the IHT that would have been due, plus interest and penalties.

For cross‑border estates, the complexity multiplies. If the deceased held cryptoassets on an exchange based in Singapore or the Cayman Islands, the executor must navigate foreign probate recognition and local data protection laws. The UK has not yet signed the Hague Convention on the Recognition of Probate, so executors may need to obtain separate grants in each jurisdiction.

Valuation Challenges and HMRC Compliance

Valuation date is a critical factor. For IHT, the relevant date is the date of death, but crypto prices can fluctuate by 20% or more within a single week. HMRC’s guidance states that executors should use the “open market value” at that date, but it does not specify which exchange rate to use. The ICAEW’s Tax Faculty recommends using the average of the three highest‑volume exchanges at 12:00 GMT on the date of death, but this is not binding.

A practical approach is to obtain a professional valuation report from a firm specialising in digital assets. Such reports typically include:

A list of all identified wallet addresses and exchange accounts.
The spot price at the time of death from a recognised index.
A calculation of the total value in GBP using the Bank of England’s daily exchange rate.

If HMRC later challenges the valuation, the executor must demonstrate that they took “reasonable care.” The penalty regime for IHT underpayment is strict: if HMRC determines that the valuation was negligent, the penalty can range from 15% to 30% of the additional tax due, depending on whether the error was prompted or unprompted. For a £500,000 crypto estate, a 10% undervaluation could result in a £20,000 penalty.

The Role of Digital Inheritance Planning

Given the legal and practical difficulties, digital inheritance planning is becoming a standard recommendation for UK residents holding cryptoassets. This involves documenting wallet access details in a secure manner that does not compromise security during the owner’s lifetime.

Options include:

Using a multi‑signature wallet where a second key is held by a solicitor or trust company.
Storing recovery phrases in a bank safety deposit box with instructions in the will.
Using a dedicated digital asset management service that provides executor access upon proof of death.

The Will itself must be updated to include a clause dealing with digital assets. Without such a clause, the executor may have no legal authority to access accounts that are subject to the deceased’s personal data rights under the UK GDPR. The Law Society of England and Wales published guidance in 2022 recommending that testators include a separate “digital asset schedule” that is kept with the will but updated more frequently.

For international clients holding UK assets, the position is further complicated by the UK’s domicile rules. A non‑UK domiciled individual who holds cryptoassets through a foreign exchange may still be subject to UK IHT if the assets are deemed to be situated in the UK. HMRC’s view is that a cryptoasset is situated where the beneficial owner is resident, not where the exchange is incorporated, a position that is currently being tested in the First‑tier Tribunal.

FAQ

Q1: Do I need to include cryptoassets in my IHT return even if the value is small?

Yes. HMRC requires all assets held at the date of death to be included in the IHT account, regardless of value. However, if the total estate (including crypto) is below the £325,000 nil‑rate band and no other reliefs apply, no IHT is due. The FCA’s 2023 Consumer Research Survey found that the median UK crypto holding is £1,200, so most estates will not exceed the threshold, but the asset must still be reported on form IHT400.

Q2: What happens if the executor cannot access the crypto wallet?

The executor must still pay IHT on the value of the inaccessible assets from other parts of the estate. If the assets are permanently lost, the executor can apply to HMRC for a “loss relief” claim under IHTA 1984 s.178, but this requires proof that the assets are irrecoverable. HMRC’s guidance states that a claim must be made within 4 years of the end of the tax year in which the loss occurred.

Q3: Will the new UK crypto regulation make it easier for executors to access accounts?

The proposed duty of disclosure under FSMA 2023 will require regulated cryptoasset firms to report accounts held by a deceased person to HMRC within 30 days of notification. This mirrors the existing bank reporting regime and should reduce the risk of hidden assets. The Digital Securities Sandbox, which began in January 2024, may also lead to clearer legal definitions of digital property ownership.

References

HM Revenue & Customs. 2023. Inheritance Tax Manual IHTM28012 – Valuation of Assets.
Law Commission of England and Wales. 2023. Digital Assets: Final Report (Law Com No 412).
Financial Conduct Authority. 2023. Consumer Research Survey on Cryptoasset Ownership (CP23/15).
HM Treasury. 2023. Future Financial Services Regulatory Regime for Cryptoassets: Consultation Response.
Bank of England & Financial Conduct Authority. 2024. Digital Securities Sandbox: Operating Framework.