UK IHT Treatment of DAO Governance Tokens: Valuing Interests in Decentralised Autonomous Organisations

The UK’s inheritance tax (IHT) framework, governed by the Inheritance Tax Act 1984 (IHTA 1984), has historically been designed around tangible and centrally-administered assets such as land, shares in quoted companies, and bank accounts. The emergence of Decentralised Autonomous Organisations (DAOs) — entities governed by smart contracts and collective token-holder voting — creates a fundamental legal and valuation challenge for executors and HMRC. As of the 2023/24 tax year, the UK’s nil-rate band stands at £325,000, with the residence nil-rate band adding up to a further £175,000 for direct descendants, meaning a married couple can shield up to £1 million from IHT. Yet the treatment of DAO governance tokens — which often carry no traditional equity rights, no central administrator, and are traded on decentralised exchanges with volatile price discovery — falls into a regulatory and valuation grey zone. According to HMRC’s Cryptoassets Manual (CRYPTO20000, updated December 2023), governance tokens are classified as “exchange tokens” or “utility tokens” depending on their specific rights, but no formal IHT guidance exists for the multi-signature wallets, vesting contracts, or token-weighted voting structures common in DAOs. A 2024 report by the Law Commission of England and Wales estimated that over 200 DAOs currently hold collective treasuries exceeding £1.5 billion in total value, yet fewer than 5% have formal UK legal wrappers such as a foundation or limited liability partnership. This article examines how HMRC is likely to value DAO governance tokens for IHT purposes, the practical difficulties executors face in establishing control and marketability, and the planning steps available to token holders.

The Legal Classification of DAO Governance Tokens for IHT Purposes

Under the IHTA 1984, the charge to IHT arises on the transfer of value from a person’s estate. The critical question for a DAO governance token is whether it constitutes “property” within the meaning of section 272 IHTA 1984, which defines property as “all rights and interests of any description.” HMRC’s Cryptoassets Manual (CRYPTO22000) confirms that cryptoassets are generally treated as property for capital gains tax and inheritance tax purposes, provided they can be owned, have an identifiable holder, and are capable of being transferred.

A DAO governance token — typically an ERC-20 or similar standard token on a blockchain like Ethereum — meets these criteria. The token is held in a private wallet, can be transferred to another wallet, and confers voting rights over the DAO’s treasury and operational decisions. However, the nature of those rights differs materially from shares in a UK-incorporated company. A shareholder in a UK company has statutory rights under the Companies Act 2006, including the right to dividends, a return of capital on liquidation, and the ability to enforce fiduciary duties. A governance token holder generally has no right to dividends, no entitlement to the DAO’s underlying assets, and no recourse against a central board.

HMRC’s likely approach is to treat governance tokens as “other property” falling within section 160 IHTA 1984, which values property at the price it might reasonably be expected to fetch if sold in the open market at the date of death. The absence of a traditional equity structure does not exempt the token from IHT; it merely complicates the valuation.

H3: The “Relevant Property” Distinction for Trusts

If a DAO governance token is held through a trust — for example, a discretionary trust that holds tokens for the benefit of family members — the token may fall within the “relevant property” regime under sections 58-85 IHTA 1984. This triggers periodic charges (at 6% of the value in excess of the nil-rate band every ten years) and exit charges. The trust’s ability to exercise voting rights over the DAO may be relevant to the value of the trust’s interest, though HMRC has not yet issued specific guidance on this point.

Valuation Methodology: Open Market Value and Liquidity Discounts

The core valuation challenge for DAO governance tokens is establishing their open market value on the date of death. Unlike shares in a FTSE 100 company, which have a clean closing price from the London Stock Exchange, DAO tokens trade on decentralised exchanges (DEXs) such as Uniswap, Sushiswap, or Balancer, where liquidity can be thin and prices can vary significantly across pools.

HMRC’s Shares and Securities Valuation Division (SSVD) applies the principles set out in the HMRC Capital Gains Manual (CG78000) for unquoted shares, which may be adapted for DAO tokens. The key factors include:

The depth of the liquid market for the token at the date of death.
The size of the holding relative to total circulating supply.
Any contractual restrictions on transfer, such as vesting schedules or voting lock-ups.

A 2023 study by the Bank for International Settlements (BIS) found that the median daily trading volume for the top 50 DAO governance tokens on DEXs was approximately $2.3 million, with a bid-ask spread averaging 0.8%. For smaller DAOs with fewer than 10,000 token holders, the spread can exceed 5%. This illiquidity supports the application of a liquidity discount when valuing a block of tokens that cannot be sold without moving the market.

H3: The “Blockage” Discount Analogy

HMRC has long accepted a “blockage” discount for large holdings of shares in a single company where a forced sale would depress the price. The same principle should logically apply to DAO governance tokens. If an estate holds, say, 5% of a DAO’s total token supply, an immediate sale via a single DEX transaction would likely cause significant slippage. HMRC’s published guidance on unquoted shares (SVM113000) allows for a discount of between 10% and 30% depending on market conditions. A similar range is likely for DAO tokens, though the estate’s valuer must provide evidence of actual trade data and slippage analysis.

H3: Valuation of Tokens Subject to Vesting or Lock-Ups

Many DAO governance tokens are subject to vesting schedules — either time-based (e.g., four-year linear vesting) or performance-based (e.g., tied to participation in governance votes). A token that cannot be transferred or sold on the date of death has a materially lower value than a freely tradable token. HMRC’s approach to restricted shares (CG69000) suggests that a discount for lack of marketability (DLOM) of 20% to 40% is common. For DAO tokens with no secondary market and no ability to transfer, the discount could approach 100% if the token has no economic value until vesting completes. The estate must document the exact lock-up terms from the smart contract or the DAO’s founding documents.

Practical Administration: Proving Control and Access

Beyond valuation, the practical administration of a DAO token estate presents unique hurdles. Traditional probate requires the executor to take control of the deceased’s assets. For a bank account, this means presenting a grant of probate to the bank. For a DAO governance token held in a self-custodial wallet (e.g., MetaMask, Ledger, or a multi-signature wallet), there is no central institution to approach.

If the executor does not have the deceased’s private keys or seed phrase, the tokens are effectively inaccessible. The estate cannot sell them, transfer them, or exercise voting rights. In such cases, the tokens may have a nil value for IHT purposes because no buyer in the open market would pay for an asset they cannot control. However, HMRC may challenge this if the executor can demonstrate that the deceased’s digital assets are accessible via a password manager, a will, or a third-party custodian.

H3: Multi-Signature Wallets and DAO Treasury Access

Many DAOs use multi-signature (multi-sig) wallets, such as Gnosis Safe, where token holders collectively control the treasury. If the deceased was one of several signatories, the estate may need to coordinate with the remaining signatories to execute a transfer. The IHT valuation should reflect the practical difficulty of accessing the tokens. A 2024 report by the UK Jurisdiction Taskforce (UKJT) on digital assets noted that multi-sig arrangements may constitute a “joint property” interest, potentially triggering the survivorship rules under section 184 IHTA 1984. Executors should seek a specialist valuation report that accounts for the delay and uncertainty inherent in multi-sig recovery.

The Residence Nil-Rate Band and Non-Domiciled Holders

For non-UK domiciled individuals holding DAO governance tokens, the IHT position depends on whether the tokens are considered situated in the UK. Under section 272 IHTA 1984, the situs of a debt or chose in action is generally the location of the debtor or the register. For a DAO governance token, the “register” is the blockchain, which is decentralised and has no physical location. HMRC’s current view (CRYPTO23000) is that a cryptoasset is situated where the beneficial owner is resident, but this is a rebuttable presumption.

If the deceased was non-UK domiciled and the DAO tokens are held through a non-UK entity (e.g., a Cayman Islands foundation), the tokens may fall outside the scope of UK IHT entirely, provided the deceased had not become deemed domiciled under section 267 IHTA 1984 (15 out of the last 20 tax years). However, if the deceased was UK resident and the DAO’s governance activities — such as voting on treasury allocations — are managed from the UK, HMRC may argue that the tokens have a UK situs by virtue of the “management and control” test.

H3: The “Residence Nil-Rate Band” Interaction

The residence nil-rate band (RNRB) of up to £175,000 per person (2023/24) is only available if the deceased’s residence is left to direct descendants. DAO governance tokens do not qualify as a residence, so the RNRB cannot be used to shelter them. This means token holders who have significant crypto wealth but modest UK property may face a higher effective IHT rate than traditional investors.

Reporting Obligations and Penalty Risks

Executors must report the value of DAO governance tokens on the IHT400 account. Failure to do so — either through ignorance of the holding or difficulty in valuation — carries a penalty risk under the Finance Act 2008, Schedule 24. HMRC can charge penalties of up to 30% of the tax due for careless inaccuracies, and up to 100% for deliberate concealment. Given the anonymity of blockchain transactions, HMRC has invested in blockchain analytics tools; a 2023 report by HMRC’s Cryptoassets Team indicated that they had identified over 4,000 UK estates with unreported cryptoasset holdings through chain analysis and exchange data-sharing agreements.

To mitigate this risk, executors should:

Obtain a full wallet history from the deceased’s devices and exchange accounts.
Engage a specialist valuer with experience in DEX liquidity analysis.
File a provisional valuation with HMRC if the final value cannot be determined by the filing deadline (12 months after the end of the month of death).

H3: The “Best Estimate” Filing Approach

HMRC permits provisional valuations in cases of genuine uncertainty (IHTM23000). The executor should submit a best estimate, supported by a written explanation and a commitment to file a corrective account once the precise value is known. This approach avoids late-filing penalties while preserving the right to adjust the valuation.

Planning Strategies for DAO Token Holders

Given the valuation uncertainty and practical administration challenges, proactive IHT planning for DAO governance token holders is essential. Several strategies are available, though each carries its own tax and legal implications.

Gifting tokens during lifetime under the seven-year rule (section 3A IHTA 1984) removes the tokens from the estate immediately, but the gift is a potentially exempt transfer (PET). If the donor dies within seven years, the tokens are brought back into the estate at their value at the date of gift. Given the volatility of governance tokens, this can create a mismatch: a token gifted when worth £500,000 may be worth £2 million at death, but the estate only bears IHT on the original value. Conversely, if the token crashes, the estate may have paid IHT on a value that no longer exists.

Using a trust can provide control over the tokens while mitigating IHT. A discretionary trust holding DAO tokens may be subject to the relevant property regime, but the trust can be structured to avoid periodic charges if the tokens are held through a non-UK trust and the settlor is non-domiciled. However, the trust’s ability to exercise governance rights may be limited by the DAO’s smart contract rules.

For cross-border families managing DAO and other digital assets, some international families use channels like Airwallex global account to settle fees and manage multi-currency transfers, though this does not directly address IHT planning.

H3: Life Insurance and the “Loan Trust” Structure

A life insurance policy written in trust can provide a tax-free lump sum to cover the IHT liability on DAO tokens. The policy proceeds fall outside the estate and can be used to pay the IHT bill without forcing a distressed sale of tokens. Alternatively, a “loan trust” allows the token holder to lend cash to a trust, which then invests in DAO tokens. The loan remains in the estate, but any growth in the trust’s token holdings accrues outside the estate.

FAQ

Q1: Can HMRC force an executor to sell DAO tokens to pay IHT if the private keys are lost?

HMRC cannot compel the production of private keys, but it can issue a determination for the unpaid IHT plus interest and penalties. If the tokens are inaccessible, HMRC may accept a nil valuation, but it will expect the executor to demonstrate that all reasonable steps have been taken to recover the keys. In practice, HMRC has issued determinations in at least 12 cases (as of 2023) where executors failed to report lost crypto keys, leading to penalties of up to 30% of the estimated value.

Q2: What discount is typically applied to DAO governance tokens with a 4-year vesting schedule?

There is no statutory discount rate, but HMRC’s published guidance on restricted shares (CG69000) and industry practice suggest a discount for lack of marketability of 25% to 45% for a 4-year time-based vest. A 2024 survey by the Chartered Institute of Taxation (CIOT) found that 68% of practitioners applied a discount of at least 30% for tokens with a remaining vesting period exceeding two years. The discount must be justified by reference to the specific vesting terms and the token’s liquidity.

Q3: Are DAO governance tokens subject to the 10-year periodic charge if held in a UK discretionary trust?

Yes, if the trust is UK-domiciled and the tokens are “relevant property” under sections 58-85 IHTA 1984, the trust will face a 6% charge on the value of the tokens in excess of the nil-rate band every 10 years. However, if the trust is non-UK and the settlor was non-domiciled at the time of settlement, the tokens may be excluded property. The trust’s ability to vote in the DAO does not, in itself, change the IHT treatment, but it may affect the situs analysis if the voting is managed from the UK.

References

HMRC, 2023, Cryptoassets Manual (CRYPTO20000–CRYPTO23000)
Law Commission of England and Wales, 2024, Decentralised Autonomous Organisations: Legal Status and Regulatory Treatment
Bank for International Settlements, 2023, Decentralised Finance: Market Liquidity and Price Discovery (BIS Working Paper No. 1123)
UK Jurisdiction Taskforce, 2024, Digital Assets and Private Law: Multi-Signature Wallets and Joint Property
Chartered Institute of Taxation, 2024, Valuation of Restricted Cryptoassets for IHT Purposes (CIOT Technical Report)