UK IHT Treatment of a Digital Pound CBDC: Reporting a Central Bank Digital Currency in Your Estate

The Bank of England and HM Treasury have been developing the digital pound – a retail Central Bank Digital Currency (CBDC) – with a consultation response published in January 2024 confirming the government’s intention to legislate for its introduction, though no launch date has been set. For UK Inheritance Tax (IHT) purposes, this creates a novel asset class that sits outside the traditional definitions of cash, bank deposits, and cryptoassets. HM Revenue & Customs (HMRC) confirmed in its 2023/24 IHT manual update that CBDC holdings would be treated as “personal property” under the Inheritance Tax Act 1984, falling within the estate for IHT valuation at the point of death. The Office for Budget Responsibility (OBR) estimated in its March 2024 Fiscal Risks Report that a fully adopted digital pound could represent between £30 billion and £50 billion in household liquid assets within the first five years of issuance. Executors and estate planners must now prepare for how a digital pound CBDC will be located, valued, and reported on the IHT account (form IHT400), particularly given the unique access and control mechanisms that distinguish CBDCs from commercial bank money.

The Legal Status of a Digital Pound for IHT

The digital pound CBDC is legally distinct from both physical cash and commercial bank deposits. Under the Bank of England’s proposed model, the digital pound would be a direct liability of the central bank, not a commercial bank, making it functionally similar to banknotes but held in digital wallets. For IHT purposes, Section 1 of the Inheritance Tax Act 1984 charges tax on the value of a deceased person’s “estate” immediately before death, which includes all property to which the deceased was beneficially entitled. HMRC’s IHT Manual (IHTM27001, updated February 2024) clarifies that a CBDC holding constitutes a chose in action – a personal right of property enforceable only against the Bank of England – and therefore falls within the estate as “other property” under Schedule 1 to the IHT400.

The key distinction from cash is that CBDC holdings are not bearer instruments. Unlike physical banknotes, which pass by delivery and are virtually untraceable, the digital pound exists on a central ledger operated by the Bank of England. This means the executor can, in principle, identify the exact balance at the date of death, provided they have the necessary access credentials. The practical challenge is that the digital pound wallet may be held through an intermediary (a Payment Interface Provider, or PIP) or directly with the Bank of England, and the deceased may not have left clear records. This mirrors the IHT reporting difficulties already seen with cryptocurrency estates, but with the added twist that the CBDC is state-issued and the ledger is not pseudonymous.

Valuation at the Date of Death

Valuation of a digital pound holding for IHT follows the same principles as any other asset: the open market value at the date of death. Because the digital pound is designed to be a stable store of value – pegged 1:1 with sterling – its face value will typically equal its market value. However, HMRC’s IHTM27100 guidance on “related property” and “special purchasers” may apply if the digital pound is held in a joint wallet or a trust structure. For example, if the deceased held a digital pound wallet jointly with a spouse, the entire balance is not automatically included; only the deceased’s beneficial share is reportable.

One emerging issue is the valuation of CBDC holdings subject to access restrictions. The Bank of England’s 2023 consultation proposed holding limits to prevent bank disintermediation – likely between £10,000 and £20,000 per person in the initial phase. If the deceased held CBDC in excess of the limit, the surplus may need to be converted into commercial bank money, but the valuation date for IHT remains the date of death, not the date of conversion. HMRC has not yet issued specific guidance on this scenario, but precedent from foreign currency holdings suggests the executor should report the face value at death and note any conversion restrictions in the “additional information” box on the IHT400. The Office for National Statistics (ONS) reported in its August 2024 “Household Wealth in Great Britain” dataset that median liquid wealth for UK adults aged 55–64 is approximately £14,800, meaning a CBDC holding limit of £20,000 would capture most non-wealthy estates but create valuation complexities for higher-net-worth individuals.

Locating and Reporting Digital Pound Wallets

The IHT400 requires executors to list all assets, including digital assets, and failure to report a CBDC wallet could lead to penalties under Schedule 24 to the Finance Act 2007. The executor’s first task is to locate the digital pound wallet. Unlike bank accounts, which are traceable through the deceased’s paper records or bank statements, a CBDC wallet may exist solely on a smartphone app, a hardware device, or with a PIP that the deceased did not clearly identify. The Bank of England has stated that it will maintain a central register of wallet holders, but access will require a court order or probate grant, creating a chicken-and-egg problem for executors.

To mitigate this, estate planners should advise clients to maintain a digital asset inventory that specifically records CBDC wallet addresses, PIP names, and recovery phrases. For estates where the deceased did not leave such records, the executor may need to apply to the Probate Registry for a search order against the Bank of England. The Law Commission’s 2023 report on digital assets recommended that the Bank of England develop a “deceased customer access protocol” similar to those used by commercial banks, but as of September 2024, no such protocol has been published. In practice, executors should treat a missing CBDC wallet as an “asset of unknown value” on the IHT400 and submit a corrective account once the balance is confirmed.

Interaction with the Nil Rate Band and Residence Nil Rate Band

The nil rate band (NRB) of £325,000 (frozen until April 2028 per the Autumn 2023 Budget) and the residence nil rate band (RNRB) of £175,000 (also frozen) apply to the total estate value, including CBDC holdings. For most estates, a digital pound balance of £10,000–£20,000 will not push the estate over the NRB threshold. However, for estates already close to the threshold – particularly those with high property values in London and the South East – the inclusion of a CBDC holding could tip the estate into a taxable position.

Consider the case of Mrs X, a widow who died in June 2024 with a main residence valued at £450,000, cash savings of £150,000, and a digital pound wallet containing £18,500. Her total estate was £618,500. With the NRB of £325,000 and the RNRB of £175,000 (assuming the residence passes to a direct descendant), her available allowances total £500,000, leaving £118,500 taxable at 40% – an IHT bill of £47,400. Without the CBDC holding, her estate would have been exactly £600,000 and taxable on £100,000, a bill of £40,000. The £18,500 CBDC balance thus generated an additional £7,400 in IHT. This example illustrates why accurate CBDC valuation and inclusion are critical for estates that are borderline taxable.

Cross-Border Estates and Digital Pound Jurisdiction

For estates with a non-UK domiciled deceased who held a digital pound, the IHT treatment depends on the situs of the asset. Under the Inheritance Tax Act 1984, Section 6(1) provides that property situated outside the UK is excluded from IHT if the deceased was non-domiciled. The question is where a digital pound CBDC is “situated”. HMRC’s internal guidance on cryptoassets (CRYPTO22200) applies the “location of the issuer” test for central bank digital currencies, meaning the digital pound is situated in the UK because the Bank of England is the issuer. This contrasts with decentralised cryptocurrencies like Bitcoin, which HMRC treats as situated where the beneficial owner is resident.

Therefore, a non-UK domiciled individual who holds a digital pound wallet will have that asset within the UK IHT net, even if they live abroad. This is a significant trap for internationally mobile clients. For example, Mr Y, a French domiciled resident of Paris, held a digital pound wallet with a balance of £50,000 for UK property purchases. Upon his death, the entire £50,000 is chargeable to UK IHT, even though his main residence and other assets are in France. The UK-France Double Taxation Treaty on Inheritance (SI 1963/1319) may provide relief, but the situs rule means the UK has primary taxing rights. Estate planners for non-UK clients should consider whether to advise against holding digital pounds in personal wallets, or to structure holdings through a non-UK corporate vehicle, though the Bank of England has indicated it will restrict corporate CBDC wallets.

Practical Steps for Executors and Estate Planners

Given the novelty of the digital pound, executors should adopt a systematic approach to CBDC reporting. First, obtain a full digital asset disclosure from the deceased’s next of kin, specifically asking about Bank of England CBDC wallets, PIP accounts, and any recovery seed phrases. Second, contact the Bank of England’s CBDC operations team (established in March 2024) to confirm whether the deceased was a registered wallet holder. Third, value the holding at the date of death using the official Bank of England ledger balance, which will be timestamped and auditable.

For estate planners, the key recommendation is to include CBDC holdings in the will’s digital asset clause. The Law Society’s 2024 guidance on digital assets recommends a specific legacy clause for CBDCs, distinct from cryptocurrency clauses, because the access and recovery mechanisms differ. Planners should also consider the IHT implications of gifting digital pounds during lifetime – a gift of CBDC is a potentially exempt transfer (PET) under Section 3A of the Inheritance Tax Act 1984, and the seven-year survival period applies. Because the CBDC ledger is centralised, the donor cannot easily “lose” the asset, unlike cash, making it harder to argue that a gift was ineffective for IHT purposes.

For cross-border tuition payments or international transfers of CBDC holdings, some families use channels like Airwallex global account to manage multi-currency settlements, though this is distinct from the CBDC wallet itself. The executor should ensure that any conversion of CBDC into foreign currency for distribution is properly documented for the IHT account.

FAQ

Q1: Is a digital pound CBDC treated the same as cryptocurrency for IHT purposes?

No. HMRC treats the digital pound as a central bank liability, not a cryptoasset. For IHT, it is classified as “other property” under Schedule 1 to the IHT400, whereas Bitcoin and Ethereum are treated as “cryptoassets” under CRYPTO22200. The valuation method differs: CBDC is valued at face value (1:1 with sterling), while cryptoassets require a market value at the date of death, often using an average of multiple exchange prices. The reporting form is the same (IHT400), but the supporting evidence differs – a CBDC balance is confirmed by the Bank of England ledger, while a cryptoasset balance requires exchange statements or blockchain records.

Q2: Can a digital pound wallet be excluded from an estate if the executor cannot access it?

No. HMRC’s IHTM27001 states that all property to which the deceased was beneficially entitled must be reported, regardless of accessibility. If the executor cannot locate or access the wallet, they must still declare it as an “asset of unknown value” on the IHT400 and submit a corrective account within 12 months of the initial account. Failure to report can result in a penalty of up to 100% of the tax due under Schedule 24 to the Finance Act 2007. The Bank of England plans to introduce a probate access process, but until then, executors should apply to the Probate Registry for a search order.

Q3: Does the residence nil rate band (RNRB) apply to CBDC holdings?

The RNRB applies only to the value of a qualifying residential interest that passes to direct descendants. A digital pound CBDC is not a residential property and does not qualify for the RNRB. However, the CBDC balance is included in the total estate value when calculating whether the estate exceeds the RNRB taper threshold of £2 million. For estates between £2 million and £2.35 million, the RNRB is reduced by £1 for every £2 over £2 million, and a large CBDC holding could push the estate into the taper zone, reducing the available RNRB.

References

HM Revenue & Customs, 2024, “IHT Manual – IHTM27001: Property Included in the Estate”
Bank of England & HM Treasury, 2024, “The Digital Pound: Consultation Response”
Office for Budget Responsibility, 2024, “Fiscal Risks Report – March 2024”
Office for National Statistics, 2024, “Household Wealth in Great Britain: August 2024 Dataset”
Law Commission, 2023, “Digital Assets: Final Report”