What are the tax implications of investing in cryptocurrency?

Posted on By Joanna Pegum
trader with phone and laptop

Most of us lead lives that are heavily digital. We think nothing of sending emails in our personal and professional lives, reading e-books and e-newspapers, taking and sharing digital pictures and videos, and meeting our family, friends and others on social media. Investing in cryptocurrency might seem a logical next step, but what is it, and what are the tax implications?

For the last decade and more, many people have invested in blockchain with a view to creating a global accountancy system for the ownership of possessions (both tangible and non-tangible). Cryptocurrencies, including Bitcoin, Ethereum and Ripple are a type of non-tangible asset. These currencies are digital in nature, are not formally issued by any central bank, and can be traded or used as payment globally.

Cryptocurrencies take a range of forms including:

  • exchange tokens that can be used as payment for goods or services (similar to traditional currency);
  • utility tokens that provide the owner with access to certain goods or services; and
  • security tokens that provide the owner with security for a debt or provide the owner with profits from the security.

Legal questions arising

Cryptocurrencies have created problems from a legal perspective. It is unclear whether they are truly assets with value that can be owned, and if they are, whether they can be legally transferred to others, say, through a will or a prenuptial agreement.

If the owner of cryptocurrencies has a connection to more than one country or jurisdiction, it is not clear whose laws would govern the transfer of the cryptocurrencies and whose tax regime the currencies would be subject to.

In late December 2019, HMRC issued some guidance on its view of the law surrounding cryptocurrencies, focusing on exchange tokens.

The location of exchange tokens

Exchange tokens are considered to be situated for tax purposes in the jurisdiction in which the owner is resident. This may have a greater impact on those who are non-domiciled but resident in the UK (and paying tax on a remittance basis), as the cryptocurrencies are treated as being situated in the UK and will be subject to UK tax. See where is my domicile, if you are unsure.

Exchange tokens belonging to individuals who are not resident in the UK are not subject to the UK tax regime.

Tax treatment of exchange tokens for UK residents

Capital Gains Tax

HMRC’s view is that the majority of owners  considers that the majority of owners purchase or are given exchange tokens on an infrequent basis, wait for the value to go up, and then sell them. Profits made on exchange tokens are therefore subject to capital gains tax in the normal way, and a liability is incurred every time the exchange token is disposed of (ie sold, transferred to another, or used as payment) at a profit.

It’s important to keep records of the dates on which disposals are made (and the value of the exchange token on that date) to ensure that tax returns are accurate.

Income Tax

HMRC may tax gains made on exchange tokens as income for substantial traders of exchange tokens – and note that income tax rates are generally higher than capital gains tax rates.

Equally, if an individual receives exchange tokens (or any form of cryptocurrency) as a result of employment, then that will also be subject to income tax and national insurance contributions.

Inheritance tax

The value of cryptocurrencies owned by an individual is treated as forming part of the individual’s estate, and will be subject to inheritance tax on their death. Note again, the owner’s country of residence is an important factor in deciding whether the cryptocurrencies will be subject to UK inheritance tax.

Keep proper records

If you have cryptoassets, you need to keep records of the following when disposing of them:

  • the type of cryptoasset;
  • the date of the transaction;
  • whether if they were bought or sold;
  • the number of units;
  • the value of the transaction in pounds sterling;
  • the cumulative total of the investment units held; and
  • bank statements and wallet addresses, if needed for an enquiry or review.

Where can I get advice?

A qualified professional can provide advice and help you to make the necessary disclosures on your tax return.

• See also Do I need to declare my cryptocurrency to HMRC?

Joshua Ryan is a solicitor at Weightmans LLP, London 

Can the gifts I made during my lifetime be challenged after my death?

Posted on By Joanna Pegum
gift in the post

Making lifetime gifts to reduce the value of your estate on death for inheritance tax purposes is a useful way to preserve wealth down the generations.

HMRC allows a variety of exemptions including an annual allowance of £3,000, gifts worth less than £250, wedding gifts, gifts to help with living costs, and gifts from surplus income. Gifts between spouses, gifts to charity and some gifts to political parties are also exempt. Any gifts that do not qualify for these exemptions are known as Potentially Exempt Transfers (PETs) and will affect the donor’s nil-rate-band if the donor dies within seven years. If the value of any PETs made in the last seven years of life is above the value of the nil-rate-band, then the recipient is liable for the inheritance tax due on the gift. It is therefore important to take tax and legal advice before making gifts.

Earlier gifts

When you die, the gifts that you made during your lifetime can be called into account on distribution of the estate by including a ‘hotchpot’ clause in your will. This clause will direct the executors, before distributing the estate, to take into account any gifts you made during your lifetime (from the date of the will or a specified earlier date) that are worth over a specified amount. This can often cause arguments between beneficiaries, however, particularly if you were not transparent about gifts during your lifetime.

Gifts of personal possessions can also cause conflict if you have promised  someone that they will inherit certain items on death, but then give them away during your lifetime. If these items are specifically mentioned in your will, then these gifts will fail on death.

It is therefore vitally important that if you are considering making lifetime gifts, you should properly document who is to get what, preferably by deed, sign it, and get it witnessed to avoid any confusion on your death. At the very least, you should keep a record of gifts that you have made during your lifetime and sign the record. It is good practice to keep any documents about lifetime gifts with your will, so if there are any challenges, the executors will have all the information they need. It will also assist with completing the account for inheritance tax.

How can gifts be challenged?

A lifetime gift can be set aside on your death if it can be shown that you were unduly influenced into making the gift, or that you lacked the mental capacity to do so.

There are considered to be two types of undue influence:

  1. Actual undue influence, i.e. overt acts of improper pressure or coercion.
  2. Presumed undue influence – this arises from the relationship of trust and confidence between the donor and the recipient.

Lawyers are seeing an increasing number of challenges to gifts on the basis of undue influence, so again, it is important to clearly document your intentions when making gifts to ensure they are not challenged on your death.

If you are concerned about the tax or other implications of making lifetime gifts, you should speak to a qualified practitioner, who will be able to provide you with advice and recommendations based on your specific circumstance.

Andrea Jones TEP, senior associate, and Paula Myers, Partner and National Head of Will, Trust and Estate Disputes at Irwin Mitchell Private Wealth, Leeds.

How can I leave my pension to the person I choose?

Posted on By Joanna Pegum
father and son

It’s easy to think that everything you own will be distributed according to your will when you die. Your pension, though, is a different matter. Pensions are not considered part of your estate, and generally not subject to inheritance tax. Most importantly, you will need to specify who will benefit, via a particular form, known as a nomination form or Expression of Wish form.

What is a nomination form?

Most pensions, aside from the state pension, will require you to complete a nomination form. This will allow you to give details of the loved ones that you would like to benefit from your pension when you die, who are known as your beneficiaries. While nomination forms usually only apply to lump sum benefits from a pension on death, and not to the transfer of a drawdown pension (i.e pension income),  providers do vary. You will need to ask your provider(s) what they require.

Who can I nominate?

You can nominate anyone you like, including family, friends, charities, clubs or associations.

If I am married, will my spouse automatically get my pension?

Your pension provider may automatically nominate your spouse or civil partner to receive the lump sum in the absence of a nomination form, but you should check the details of your policy and make sure it complies with your wishes.

How many people can I nominate?

Each individual pension provider should specify their requirements on the form. Some providers state that you can nominate up to 25 beneficiaries.

What happens if I nominate my personal representatives?

If you nominate the ‘personal representatives’ or ‘executors’ of your will, or more simply your ‘estate,’ there is a good chance that your pension lump sum will form part of your estate and will become subject to inheritance tax.

Is it legally binding?

Most pension providers will state that your nominations will not be legally binding, and the distributions will be made at their discretion. In the majority of cases, they will comply with your instructions if they are clear and up to date. They may be more inclined to disregard your wishes if the information appears to be out of date or inappropriate, for example if someone has died or got divorced.

What happens if I don’t fill in the form?

Distributions are usually made at the provider’s discretion if you don’t submit a nomination form. Some pension providers have a policy that they will automatically pass the lump sum to your spouse or civil partner, but this is not guaranteed, and you should check your policy.

What information should I provide?

Each pension plan is different, but generally you will be asked to provide your pension account number or reference number, the full name of each beneficiary, their date of birth and address and their relationship to you. You will then be asked what percentage share of the lump sum you would like to leave them. You must ensure that the shares add up to 100%, otherwise your provider may be obliged to use their discretion. You can of course leave 100% to one person or organisation.

How can I update it?

The nomination form can be updated as frequently as necessary, and often online, so make sure you keep your beneficiary’s personal details current and correct. The forms can usually be revoked or amended at any time.

How can I prepare for inheritance tax?

Posted on By admin
family

Inheritance tax is a 40% tax on your estate (your property, money and possessions), which is charged when you die. In most cases you only have to pay it if your estate is worth more than £325,000.

If your estate is likely to exceed this, there are some steps you can take to prepare for inheritance tax, and to ensure more of what you own goes to your loved ones.

Write a will

It’s well worth writing a will for a number of reasons. A professional advisor can make sure that your will takes into consideration any tax benefits that are available to you. If any benefits are overlooked, your executors can amend the will after your death, with a deed of variation.

Work out the value of your estate

You’ll need to work out how much your estate is worth to find out if you are going to be liable for inheritance tax. No tax is payable on the first £325,000, and this is known as the nil-rate band. But if you’re married, or in a civil partnership, you can pass your whole estate to your spouse or civil partner when you die, tax free. Your ‘nil-rate band’ then transfers to your spouse or civil partner, so when he or she dies, they will be able to pass on up to £650,000 tax free.

Inheritance tax benefits

Everybody gets an additional £175,000 free of inheritance tax to use against the value of their home, if it is left to children or grandchildren (2021-22 figures). As this allowance can be transferred to the second spouse/civil partner, a married couple could leave their family a combined estate of up to £1 million tax-free.

Both the nil-rate band and residence nil-rate band will be frozen until 5 April 2026.

Other tax benefits

There are other benefits you can use, mainly by reducing the value of your estate. There is an annual exemption of £3,000 that you can give away inheritance-tax free and you can give £250 to as many different people as you like. Donations to charities are tax free, as are wedding/civil partnership gifts from parents (up to £5,000) from grandparents (up to £2,500) and from anyone else (up to £1,000). You can make cash gifts larger than this, but you will need to survive seven years for them to be free from inheritance tax. the UK’s tax authority, HM Revenue and Customs (HMRC), provides a sliding scale so you can work out how much tax is payable if you survive less than seven years.

Use a trust

If you can estimate the amount of money that you will need to pay for inheritance tax, you can arrange to hold a lump sum on trust. You can contribute the nil-rate band of up to £325,000 tax-free into a trust every seven years, and it will not be included in your taxable estate.

Take out a life insurance policy

To minimise any impact on your loved ones, you can take out a life insurance policy to cover your inheritance tax bill, which will pay out on your death. As above, the policy would be held on trust so would not be taxable.

Use excess income

If you can spare some of your income without this affecting your quality of life, this is known as excess income. You are entitled to make gifts of money from your excess income to other people free of inheritance tax. However you must keep good records of your regular expenditure as well as the gifts made so that your executors can report them to HMRC and obtain the inheritance-tax exemption.

Give to charity

All gifts to charity are exempt from inheritance tax, but if you arrange to give 10% of your estate to charity (less the £325,000 nil-rate band) then you can pay 36% inheritance tax on your death instead of the usual 40%.

Get help

A qualified advisor will be able to assess your individual circumstances and advise on what you can do to prepare for inheritance tax.