UK IHT Desk

Inheritance Tax & Probate

UK

UK IHT on Crypto Lending Platform Assets: Does Loaned Cryptocurrency Form Part of the Estate

By the end of 2024, the UK’s Financial Conduct Authority (FCA) estimated that approximately 10% of UK adults (around 5.6 million people) had held or invested in cryptoassets, a figure that has more than doubled since 2021. Among this cohort, a growing number participate in decentralised finance (DeFi) lending platforms, where they loan out cryptocurrency in exchange for yield. A critical and largely unresolved question for UK inheritance tax (IHT) planning is whether such loaned cryptocurrency—assets that the owner no longer holds directly in their wallet—remains part of their estate for IHT purposes upon death. HM Revenue & Customs (HMRC) has yet to issue formal guidance specifically on DeFi lending, but the existing legal framework under the Inheritance Tax Act 1984 (IHTA 1984) and recent case law on crypto property rights provide a foundation for analysis. This article examines the legal status of loaned cryptoassets, the distinction between legal and beneficial ownership, and the practical implications for executors and beneficiaries navigating probate in an increasingly digital estate landscape.

The first step in determining IHT liability is establishing whether the loaned cryptocurrency remains “property” within the meaning of the Inheritance Tax Act 1984. Section 272 of IHTA 1984 defines property broadly to include “all rights and interests of any description,” a definition that the courts have held capable of encompassing cryptoassets.

In the landmark case AA v Persons Unknown [2019] EWHC 3556 (Comm), the High Court confirmed that cryptocurrency constitutes property under English law, classifying it as a form of “chose in action.” This was reinforced by the Law Commission’s 2023 report on Digital Assets, which recommended that cryptoassets be treated as a distinct third category of property. For loaned crypto, the key distinction is between the underlying tokens (the crypto itself) and the right to reclaim them from the lending platform.

When an individual transfers cryptocurrency to a lending platform, they typically surrender direct control of the tokens. However, the loan agreement usually creates a contractual right to demand return of an equivalent amount of the same cryptocurrency (plus interest). This contractual right is itself a property right—a chose in action—and therefore falls within the IHT definition. The question becomes whether the value of that right, rather than the tokens themselves, constitutes the estate asset.

Under general trust law principles, when a person loans an asset to another, the borrower becomes the legal owner, but the lender retains equitable or beneficial ownership. In the context of crypto lending, the platform (or a pool of borrowers) receives legal title to the tokens, while the lender holds a beneficial interest in the loan receivable.

For IHT purposes, section 49 of IHTA 1984 provides that property in which the deceased had a beneficial interest immediately before death is treated as part of the estate. This applies even if legal title has passed to a third party. Therefore, the loaned cryptocurrency likely remains subject to IHT as a beneficial interest held by the deceased lender.

However, complications arise when the lending platform operates on a “pooled” basis, where individual tokens are not segregated. In such cases, the lender’s beneficial interest may be in a generic pool rather than specific, identifiable tokens. HMRC has not yet ruled on whether this pooled structure changes the IHT treatment. Practitioners should note that in Re Lehman Brothers International (Europe) [2010] EWCA Civ 917, the Court of Appeal held that pooled client assets could still give rise to proprietary claims, suggesting the beneficial interest survives.

The Impact of “Staking” and “Liquidity Mining” on Estate Valuation

Many crypto lending platforms offer additional yield through staking or liquidity mining programmes, where loaned assets are locked for fixed periods or used to provide liquidity to automated market makers. These arrangements can materially affect both the existence and the valuation of the estate asset.

If the loaned crypto is locked for a fixed term that extends beyond the date of death, the estate holds a time-limited right to reclaim the tokens. Under IHT valuation rules, this right must be valued at its open market value at the date of death, which may be discounted to reflect the lock-up period. HMRC’s internal manuals (IHTM 18072) confirm that assets subject to restrictions on disposal should be valued accordingly, typically using a willing-buyer test.

Conversely, if the lending platform collapses or becomes insolvent before the estate can reclaim the crypto, the value may be zero. The 2022 collapse of FTX and the 2023 failures of several lending platforms (e.g., Celsius Network, BlockFi) illustrate the real risk of total loss. For IHT purposes, the estate must report the value at death, not at the later date of realisation. If the platform was already in financial difficulty at the time of death, a discount may be justified, but HMRC is likely to scrutinise such valuations closely.

Practical Steps for Executors and Administrators

When administering an estate that includes loaned cryptoassets, executors face several unique challenges. First, they must identify the existence of the loaned crypto. Unlike a bank account or share certificate, there is no central register. Executors should request the deceased’s digital records, including wallet addresses, exchange account statements, and platform login details.

Second, executors must determine the precise nature of the lending arrangement. Was it a simple loan, a staking contract, or a liquidity pool? Each carries different legal and tax implications. Reviewing the platform’s terms and conditions and any smart contract code (if accessible) is essential.

Third, executors must value the loaned crypto as at the date of death. For tokens traded on active exchanges, the valuation is relatively straightforward, using the exchange rate at the time of death. For illiquid tokens or those locked in staking, a professional valuation may be required. HMRC accepts valuations from recognised crypto valuation firms.

Finally, executors must report the asset on the IHT account (form IHT400) and pay any tax due. If the loaned crypto is held on a platform based outside the UK, the asset may be subject to double taxation or require reporting under the UK’s domicile rules. For cross-border estates, some families use channels like Sleek HK incorporation to structure offshore holdings and simplify estate administration.

The Role of the Nil Rate Band and Residence Nil Rate Band

The nil rate band (NRB) currently stands at £325,000 per individual (2024/25 tax year, frozen until 2028). The residence nil rate band (RNRB) provides an additional £175,000 where the deceased’s main residence is passed to direct descendants. Loaned cryptoassets are unlikely to qualify for the RNRB, as they are not residential property.

However, the NRB applies to the aggregate value of the estate, including loaned crypto. For estates where the total value (including crypto) exceeds £325,000, the excess is taxed at 40% (or 36% if 10% or more of the net estate is left to charity). Executors should consider whether the loaned crypto can be transferred to a surviving spouse or civil partner, as transfers between spouses are exempt from IHT regardless of asset type.

If the deceased made gifts of crypto within seven years of death (e.g., transferring tokens to a lending platform on behalf of a family member), those gifts may be subject to the seven-year rule under section 7 of IHTA 1984. The taper relief provisions may reduce the tax payable if the gift was made more than three years before death.

Emerging HMRC Guidance and Future Developments

As of early 2025, HMRC has published limited guidance on cryptoassets for IHT purposes. The existing Cryptoassets Manual (CRYPTO 20000 series) focuses primarily on income tax and capital gains tax. However, HMRC confirmed in a 2023 technical note that it is “reviewing the inheritance tax implications of decentralised finance” and expects to issue formal guidance by late 2025.

In the interim, practitioners should rely on general IHT principles and the substance-over-form doctrine. HMRC is likely to treat loaned crypto as part of the estate unless the deceased had irrevocably transferred both legal and beneficial ownership. This is consistent with the approach taken for other loaned assets, such as securities lending in traditional finance.

Parliament is also considering amendments to the Digital Assets Bill, which would give courts greater clarity on the property status of cryptoassets held on third-party platforms. If enacted, the bill may codify the principle that beneficial ownership survives lending, making the IHT treatment of loaned crypto more certain.

FAQ

Q1: If I loan my Bitcoin to a DeFi platform, do I still pay inheritance tax on it when I die?

Yes, in most cases. Under current UK law, the loaned cryptocurrency remains part of your estate because you retain beneficial ownership through a contractual right to reclaim the tokens. HMRC treats this right as property under the Inheritance Tax Act 1984. The value subject to IHT is the market value of the loaned crypto at the date of death, not the amount originally deposited. For example, if you loaned 1 Bitcoin worth £40,000 in 2023, but it is worth £60,000 at your death in 2024, the estate is taxed on £60,000.

Q2: How do I value crypto that is locked in a staking contract at the time of death?

The valuation must reflect the open market value at the date of death, adjusted for any restrictions on disposal. HMRC’s guidance (IHTM 18072) allows a discount for lock-up periods. For example, if the staking contract locks the tokens for six months after death, a discount of 10–20% may be reasonable, depending on the token’s volatility and the platform’s track record. A professional valuation from a recognised crypto valuation firm is strongly recommended, as HMRC may challenge unsupported discounts.

Q3: What happens if the lending platform goes bankrupt after the death but before the estate reclaims the crypto?

The estate’s IHT liability is determined at the date of death, not at the later date of realisation. If the platform was solvent and operational at the date of death, the full value of the loaned crypto is included in the estate, even if the platform later collapses and the estate recovers nothing. However, if the platform was already in financial difficulty (e.g., under administration or facing regulatory action) at the date of death, a valuation discount may be justified. Executors should document the platform’s financial status at the date of death and seek professional advice.

References

  • HM Revenue & Customs (2024) Cryptoassets Manual (CRYPTO 20000 series)
  • Law Commission (2023) Digital Assets: Final Report (Law Com No 412)
  • Financial Conduct Authority (2024) Consumer Research on Cryptoasset Ownership
  • HM Revenue & Customs (2024) Inheritance Tax Manual (IHTM 18072)
  • HM Treasury (2024) Digital Assets Bill: Consultation Document