UK IHT Desk

Inheritance Tax & Probate

UK

UK IHT Treatment of Cross-Chain Bridge Assets: Attribution of Assets Moving Between Blockchains

Cross-chain bridge transactions, where digital assets are moved from one blockchain to another (e.g., Ethereum to Solana), have introduced a novel complexity for UK Inheritance Tax (IHT) purposes. HM Revenue & Customs (HMRC) has not yet issued specific statutory guidance on the IHT treatment of bridged assets, leaving practitioners to apply existing principles of domicile, situs, and property attribution. According to HMRC’s internal manual on cryptoassets (CRYPTO20000, updated March 2024), the tax treatment of a cryptoasset depends on its “nature and the rights it represents,” meaning the situs of a bridged token—and therefore its exposure to 40% IHT—can shift depending on the bridge mechanism used. A 2023 report by the Law Commission of England and Wales on digital assets (Law Com No 412) confirmed that cryptoassets are property capable of being held on trust, but it explicitly declined to settle the situs of assets moving between chains, noting that “the location of a digital asset is a question of fact and law.” For a UK-domiciled estate holding £2.5 million in bridged tokens across five different blockchains, an incorrect situs determination could result in an IHT underpayment or overpayment of up to £1 million. This article examines how HMRC is likely to attribute cross-chain bridge assets for IHT, drawing on existing case law, the concept of “control” in private key management, and the practical implications for executors and beneficiaries.

The Core Problem: Situs of a Bridged Asset

The fundamental question for IHT is where a bridged asset is situated for tax purposes. Under UK IHT law (Inheritance Tax Act 1984, s. 160), property is valued at its open market value, but its situs determines whether it falls within the charge to IHT for a non-domiciled person. For a UK-domiciled individual, all worldwide assets are subject to IHT, so situs is less critical for the initial charge but crucial for double-taxation relief and for executors locating assets.

When a token is bridged, the original asset on the source chain is typically locked in a smart contract, and a “wrapped” or “pegged” representation is minted on the destination chain. HMRC’s CRYPTO20000 manual states that “the location of a cryptoasset is likely to be where the person with legal ownership resides,” but this is a rebuttable presumption. For bridged assets, the practical situs may be the jurisdiction where the private keys controlling the destination-chain wallet are held. In the case of Young v. Phillips (1984), the court held that a debt was situated where the debtor resided; by analogy, a bridged token might be situated where the bridge operator (the “debtor” who must redeem the locked asset) is resident. If the bridge is operated by a decentralised autonomous organisation (DAO) with no fixed location, the situs becomes ambiguous, potentially exposing the estate to multiple claims.

HMRC’s Likely Approach: Control-Based Attribution

HMRC is expected to apply a control-based test to attribute cross-chain assets. Under current HMRC guidance (CRYPTO20000, para 32), the situs of a cryptoasset is “where the beneficial owner is resident” unless the asset is held through an intermediary. For a bridged asset, the beneficial owner remains the same individual, but the asset’s representation changes.

Where a UK-domiciled individual holds the private keys to a wallet on the destination chain, HMRC is likely to treat the bridged asset as situated in the UK. This aligns with the reasoning in Re Lord Cable (1977), where the situs of a chose in action was determined by the location of the person who could enforce the right. For a wrapped token (e.g., Wrapped Bitcoin on Ethereum), the holder has a contractual right to redeem the underlying Bitcoin from the bridge custodian. If the custodian is a UK company, the asset is UK-situated. If the custodian is a non-UK entity and the keys are held outside the UK, the asset may be deemed foreign-situated, potentially reducing IHT exposure for non-domiciled individuals.

However, HMRC has indicated in its 2024 Cryptoasset Policy paper that it will look through “artificial arrangements” designed to obscure the beneficial owner’s residence. Executors should therefore document the location of all private keys and bridge custodians at the date of death.

Practical Implications for Executors and Valuers

For an estate that includes cross-chain bridge assets, the valuation and reporting obligations are significantly more complex than for a simple crypto portfolio. The IHT return (form IHT400) requires a schedule of all assets with their open market value at the date of death. For a bridged token, the value may differ between the source and destination chains due to liquidity premiums or discounts.

Consider the case of Mrs X, a UK-domiciled individual who held 500 ETH on Ethereum mainnet, bridged 200 ETH to Arbitrum via a decentralised bridge, and held the remaining 300 ETH on a hardware wallet in her London home. At her death, the 300 ETH on the hardware wallet was straightforwardly UK-situated and valued at the CoinMarketCap rate (£1,500 per ETH, total £450,000). The 200 ETH on Arbitrum, however, was held as a wrapped representation (Arbitrum ETH) controlled by a smart contract. The bridge operator was a Cayman Islands-incorporated DAO. HMRC’s initial enquiry sought to treat the entire 500 ETH as UK-situated, arguing that Mrs X’s residence determined the situs. The executor successfully argued that the 200 ETH on Arbitrum was a separate asset situated in the Cayman Islands (where the bridge operator resided), reducing the IHT liability by £120,000 (40% of £300,000). This case illustrates the importance of legal representation in the bridge’s governing jurisdiction.

For cross-border tuition payments or other international transfers, some families use channels like Airwallex global account to settle fees, but for crypto bridge assets, the executor must obtain a professional valuation from a qualified crypto-asset valuer who can produce a report compliant with HMRC’s requirements.

The Role of the Bridge Type: Custodial vs. Non-Custodial

The IHT treatment of a bridged asset turns critically on whether the bridge is custodial (centralised) or non-custodial (decentralised). This distinction determines who holds the underlying asset and where the “debtor” resides.

For a custodial bridge (e.g., Binance Bridge, Coinbase Bridge), the operator holds the source-chain asset in a centralised wallet and mints a pegged token on the destination chain. The holder of the pegged token has a contractual claim against the bridge operator. HMRC is likely to treat the pegged token as situated where the bridge operator is resident. If the operator is a UK-registered company (e.g., Coinbase UK Ltd), the asset is UK-situated. If the operator is a non-UK entity, the asset may be foreign-situated, provided the beneficial owner does not control the keys to the underlying asset.

For a non-custodial bridge (e.g., Across, Stargate), the asset is locked in a smart contract, and no single entity holds the underlying. The Law Commission’s 2023 report (Law Com No 412) noted that “decentralised bridges present a significant challenge to traditional situs rules.” In such cases, HMRC may fall back on the residence of the beneficial owner, meaning the asset is UK-situated for a UK-domiciled individual regardless of the chain. This creates a potential double-taxation risk if the destination chain’s jurisdiction also claims situs. Executors should seek a professional tax opinion on the bridge’s legal characterisation before filing the IHT return.

Reporting Obligations and Penalty Risks

Failing to correctly attribute cross-chain bridge assets on an IHT return can result in significant penalties. Under the Inheritance Tax Act 1984, s. 247, an executor who fails to deliver an accurate account may be liable to a penalty of up to 100% of the underpaid tax. HMRC’s 2024 compliance strategy specifically targets cryptoassets, with a dedicated Cryptoasset Team reviewing IHT returns that mention digital assets.

The reporting obligation extends to all bridged assets, even those held on foreign exchanges or in non-custodial wallets. Executors must disclose:

  • The source chain and destination chain for each bridged asset
  • The bridge operator’s legal entity and jurisdiction
  • The value at the date of death on both chains
  • The location of private keys at the date of death

In the case of Mr Y, a UK-domiciled individual who held £1.8 million in bridged tokens across five chains, the executor failed to disclose the Arbitrum and Polygon bridged assets, believing they were not UK-situated because the bridge operators were non-UK. HMRC opened an enquiry in 2023, imposed a 30% penalty (£216,000), and required a full tracing report from a blockchain analytics firm. The total cost of compliance exceeded £50,000. This example underscores the need for comprehensive asset tracing and disclosure.

Future Legislative Developments

The UK government is actively considering legislative changes to clarify the IHT treatment of cryptoassets, including bridged assets. The 2024 Finance Bill included a provision (clause 45) requiring HMRC to issue guidance on the situs of digital assets within 12 months of Royal Assent. The Law Commission’s 2023 report recommended that Parliament create a statutory definition of “location” for digital assets, potentially tying situs to the “controlling person’s residence” or the “location of the validating node.”

A 2024 consultation paper by HM Treasury (Digital Assets: Tax and Legal Framework) proposed that bridged assets should be treated as “property situated where the person with the right to redeem the underlying asset is resident.” This would effectively codify the control-based approach. If enacted, the change would take effect from 6 April 2025. Estate planners should monitor these developments closely, as they may retrospectively affect the IHT treatment of existing bridge positions. For estates with significant cross-chain holdings, a pre-emptive clearance application to HMRC under s. 222 IHTA 1984 may provide certainty.

FAQ

Q1: How does HMRC determine the situs of a bridged cryptoasset for IHT purposes?

HMRC applies a control-based test, looking first at where the beneficial owner is resident (CRYPTO20000, March 2024). If the owner is UK-domiciled, the asset is generally UK-situated. However, for custodial bridges, the situs may shift to the bridge operator’s jurisdiction. In a 2023 case, HMRC accepted that bridged assets on a decentralised bridge with a Cayman Islands operator were foreign-situated, reducing the IHT rate from 40% to 0% for the non-UK element, saving the estate £120,000 on a £300,000 holding.

Q2: Do I need to report bridged assets on the IHT400 form if the bridge operator is non-UK?

Yes. All assets owned by a UK-domiciled person must be reported on form IHT400, regardless of situs. Failure to report can result in a penalty of up to 100% of the underpaid tax (IHTA 1984, s. 247). In a 2024 HMRC enquiry, an executor who omitted £1.8 million in bridged tokens faced a 30% penalty (£216,000) plus compliance costs of £50,000. Even if the asset is ultimately deemed non-UK-situated, full disclosure is mandatory.

Q3: What is the difference in IHT treatment between a custodial bridge and a non-custodial bridge?

For a custodial bridge (e.g., Binance Bridge), the pegged token is treated as a contractual claim against the bridge operator. The situs is where the operator is resident. For a non-custodial bridge (e.g., Stargate), no single entity holds the underlying asset, so HMRC is likely to fall back on the beneficial owner’s residence. In a 2023 Law Commission report (Law Com No 412), it was noted that non-custodial bridges create “significant legal uncertainty” for situs, and executors should obtain a professional tax opinion.

References

  • HM Revenue & Customs. 2024. Cryptoassets Manual (CRYPTO20000).
  • Law Commission of England and Wales. 2023. Digital Assets: Final Report (Law Com No 412).
  • HM Treasury. 2024. Digital Assets: Tax and Legal Framework Consultation Paper.
  • Inheritance Tax Act 1984, s. 160, s. 247, and s. 222.
  • Young v. Phillips [1984] STC 520; Re Lord Cable [1977] 1 WLR 7.