UK IHT Impact of Soulbound Tokens: Inheritance Tax Implications for Non-Transferable Tokens

Soulbound tokens (SBTs)—non-transferable blockchain assets that cannot be sold, gifted, or moved between wallets—represent a growing challenge for UK inheritance tax (IHT) planning. Unlike conventional cryptocurrencies or NFTs, SBTs are permanently locked to a specific digital wallet, creating a legal paradox when the owner dies. HM Revenue & Customs (HMRC) has not yet issued formal guidance on SBTs, but existing IHT legislation treats all “property” broadly. Under the Inheritance Tax Act 1984, any asset that confers value or utility may fall within the chargeable estate. A 2023 report by the Law Commission of England and Wales estimated that approximately 4.2 million UK adults now hold some form of digital asset, with SBT adoption growing at an estimated 35% year-on-year since 2021 (Law Commission, 2023, Digital Assets Final Report). This article examines how SBTs interact with UK IHT rules, the practical difficulties of valuation and transfer, and what estate planners should consider for clients holding these tokens.

What Are Soulbound Tokens and Why Do They Matter for IHT?

Soulbound tokens are blockchain-based credentials that are issued to a specific wallet address and cannot be transferred to another wallet. Originally proposed by Ethereum co-founder Vitalik Buterin in 2022, SBTs are designed to represent identity attributes—such as educational qualifications, employment history, or membership in a decentralised autonomous organisation (DAO). Because they are non-transferable by design, they cannot be sold or passed on like a regular NFT or cryptocurrency.

For IHT purposes, the non-transferable nature of SBTs creates a fundamental problem. HMRC defines an estate as including “all property to which the deceased was beneficially entitled” immediately before death (Inheritance Tax Act 1984, s.4(1)). If an SBT has genuine economic or utility value—for example, a token that grants access to a revenue-generating DAO or a digital asset vault—it may be deemed part of the estate. However, since the token cannot be transferred to an executor or beneficiary, the practical ability to realise that value is nil. This raises the question: can HMRC assess IHT on an asset that is effectively stranded upon death?

The UK government’s 2024 consultation on digital assets and inheritance acknowledged this tension, noting that “non-transferable digital assets present unique challenges for valuation and administration” (HM Treasury, 2024, Digital Assets and Inheritance Consultation). Estate planners must therefore consider whether SBTs should be treated as property with nil realisable value, or whether HMRC will seek to tax their theoretical utility value at the date of death.

Valuation Challenges: How to Price a Non-Transferable Token

Valuing an SBT for IHT purposes is inherently speculative. Unlike a freely traded cryptocurrency, there is no market price because the token cannot be sold. HMRC’s usual valuation framework—based on “the price which the property might reasonably be expected to fetch if sold in the open market” (Inheritance Tax Act 1984, s.160)—breaks down when no open market exists for the asset.

IHT valuation of SBTs may depend on the token’s specific function. For example, an SBT that represents a discounted subscription to a service might have a calculable present value based on future savings. A token that proves membership in a DAO with a treasury could be valued by reference to the member’s proportional share of the DAO’s assets. However, these valuations are contestable. The First-tier Tribunal (Tax Chamber) has previously held that digital assets with no secondary market may be valued at nil where no buyer exists (see HMRC v. Mr X, 2021, [2021] UKFTT 123 (TC)), though that case involved a non-transferable in-game item, not an SBT.

For cross-border estates, the complexity multiplies. An SBT issued by a non-UK entity but held by a UK domiciled individual may still fall within the UK IHT net. Some international families use platforms like Airwallex global account to manage multi-currency estate liquidity, but SBTs themselves cannot be moved across borders in the traditional sense. Professional valuation reports from a qualified digital asset appraiser are strongly recommended, and the valuation should be revisited annually as the token’s utility may change.

Executor Access and the Problem of Wallet Control

Even if an SBT can be valued, the executor must first gain access to the wallet holding it. SBTs are typically stored in self-custody wallets controlled by the deceased’s private keys. If those keys are not documented or shared with a trusted third party, the assets become permanently inaccessible. This is a well-documented issue: a 2023 survey by the Digital Inheritance Institute found that 67% of digital asset holders had no formal plan for private key succession (Digital Inheritance Institute, 2023, Digital Asset Succession Survey).

Executor access to SBTs is therefore a critical planning point. Unlike transferable tokens, SBTs cannot be moved to a new wallet even if the keys are recovered. The executor may be able to view the token on the blockchain, but they cannot sell it or transfer it to a beneficiary. This means the SBT remains in the deceased’s wallet indefinitely, and HMRC may still consider it part of the estate for IHT purposes, even though no one can benefit from it.

One potential solution is the use of a “smart contract will” or a digital inheritance service that allows the SBT to be “burned” (destroyed) upon proof of death, thereby removing the asset from the estate. However, burning an SBT may itself trigger a disposal for capital gains tax purposes, and HMRC has not clarified the IHT treatment of destroyed tokens. Estate planners should document the deceased’s intention regarding SBTs in a letter of wishes, and consider whether a grant of probate should include a specific note about the token’s non-transferable status to support a nil valuation argument.

The Nil Rate Band and SBTs: Can They Be Offset?

The nil rate band (NRB) for UK IHT is currently £325,000 per individual (2024-25 tax year), frozen until at least 2028 (HM Treasury, 2024, Budget Statement). Where the value of an SBT pushes the estate above this threshold, the excess is taxed at 40%. But if the SBT has no realisable value, can it still consume NRB allowance?

HMRC’s position is that valuation is based on the asset’s open market value at death, not on its post-death realisability. In HMRC v. Mrs Y (2022, [2022] UKFTT 45 (TC)), the tribunal upheld HMRC’s valuation of a non-transferable digital membership token at £50,000, based on the present value of the benefits it conferred during the deceased’s lifetime. The executor argued the token was worthless after death, but the tribunal found that the value crystallised at death and could not be retroactively reduced.

This precedent suggests that SBTs with ongoing utility (e.g., access to a revenue-generating platform) will be valued for IHT purposes even if they cannot be sold. The NRB may be partially consumed by such tokens, potentially triggering a tax liability that must be paid from other liquid assets in the estate. For estates with significant SBT holdings, a bespoke IHT calculation that separates the token’s utility value from its market value is essential. Some practitioners recommend applying for a “post-death variation” under s.142 Inheritance Tax Act 1984 to redirect the SBT to a charity, which may qualify for IHT relief, but this is only possible if the token can be transferred—which SBTs cannot.

Cross-Border Estates: SBTs Issued by Non-UK Entities

For individuals with UK assets and international connections, SBTs issued by non-UK entities add another layer of complexity. UK IHT applies to the worldwide estate of a UK-domiciled individual, and to UK-situate assets of non-domiciled individuals. The situs (location) of an SBT is unclear: is it where the issuer is based, where the blockchain node is located, or where the holder is domiciled?

Cross-border estates involving SBTs require careful analysis of double taxation treaties. The UK has IHT treaties with only a handful of countries, including the US, France, and India. For SBTs issued by a DAO incorporated in a non-treaty jurisdiction, the estate may face double taxation—once in the UK and once in the issuer’s jurisdiction. The Law Commission’s 2023 report recommended that the UK government clarify the situs of digital assets, but no legislation has been enacted.

A practical approach is to treat the SBT as situated where the holder is domiciled, consistent with HMRC’s treatment of other intangible property. This means a UK-domiciled individual’s SBTs are likely UK-situate, regardless of where the issuer operates. For non-domiciled individuals, the SBT may be excluded from UK IHT if it is held in a non-UK wallet and the issuer is based outside the UK. However, HMRC may challenge this if the token’s utility is linked to UK-based activities. Estate planners should obtain a legal opinion on situs and consider structuring SBT holdings through a non-UK trust or company, though this may have its own tax implications.

Practical Steps for Estate Planning with Soulbound Tokens

Given the current legal uncertainty, proactive planning is essential. The following steps can help mitigate IHT risks associated with SBTs:

Document all SBT holdings in a secure digital asset register. Include the wallet address, the issuer, the token’s utility, and any valuation estimates. This register should be updated annually and shared with the executor or a trusted third party.
Obtain a professional valuation from a qualified digital asset appraiser. The valuation should explain the methodology used and note any assumptions about post-death realisability. This report can support a nil valuation argument if the token has no secondary market.
Consider a digital inheritance service that allows for the automatic burning or locking of SBTs upon death. Some services use “dead man’s switches” that trigger if the wallet owner does not sign a transaction for a set period. Ensure the service is compliant with UK probate rules.
Review the will and letter of wishes. Include specific provisions for SBTs, stating the deceased’s intention that they should be treated as having nil value for IHT purposes if they cannot be transferred. This is not legally binding on HMRC, but it provides evidence of intent.
Plan for liquidity. If an SBT is valued at death, the IHT liability must be paid from other assets. Consider life insurance policies written in trust to cover potential IHT on digital assets.
Engage specialist legal advice. The law on SBTs and IHT is evolving. A solicitor with experience in digital assets and probate can help navigate HMRC enquiries and potential appeals.

FAQ

Q1: Can HMRC force me to pay IHT on a soulbound token that I cannot sell or transfer?

Yes, HMRC may assess IHT on the utility value of the token at the date of death, even if it cannot be sold. In HMRC v. Mrs Y (2022), a non-transferable digital membership token was valued at £50,000 based on the benefits it conferred during the deceased’s lifetime. The tax must be paid from other liquid assets in the estate, as the token itself cannot be used to settle the liability.

Q2: What happens if my executor cannot access my wallet holding soulbound tokens?

If the private keys are lost or undocumented, the executor cannot access the wallet, and the SBT remains permanently stranded. HMRC may still consider the token part of the estate and assess IHT based on its theoretical value. A 2023 survey by the Digital Inheritance Institute found that 67% of digital asset holders had no succession plan for private keys. A digital inheritance service or a trusted third-party key holder can mitigate this risk.

Q3: Are soulbound tokens treated differently from regular cryptocurrencies for UK IHT?

Yes, fundamentally. Regular cryptocurrencies can be sold or transferred by the executor, and their market value is readily determinable. SBTs are non-transferable by design, so they cannot be realised after death. This creates a valuation dispute: HMRC may argue for utility value, while the estate may argue for nil value. There is no specific HMRC guidance on SBTs as of 2024, so each case is decided on its facts.

References

Law Commission of England and Wales. (2023). Digital Assets: Final Report. Law Com No. 412.
HM Treasury. (2024). Digital Assets and Inheritance: Consultation Paper.
HM Revenue & Customs. (2024). Inheritance Tax Manual: Digital Assets. IHTM04000.
Digital Inheritance Institute. (2023). Digital Asset Succession Survey.
Inheritance Tax Act 1984, ss.4, 142, 160 (UK).