The Law Society noted a ‘striking shift’ in the number of Wills being prepared during the pandemic. However, the survey found that 93 per cent of those who have a Will have not included any digital assets in it. In our previous articles here and here, we discussed the ownership of cryptocurrencies and the challenges associated with leaving cryptoassets to the next generation, as well as providing some practical estate planning tips for individuals with cryptoassets. Owners of cryptocurrency received a salutary lesson when Gerald Cotten, the founder of Canada’s largest cryptocurrency exchange, QuadrigaCX, died suddenly leaving £145m worth of his clients’ crypto locked in inaccessible wallets. Cryptoassets are becoming increasingly popular investment vehicles and there are crucial estate planning steps that need to be taken in order for them to be safely passed to the next generation and not lost in the ether forever.
This article provides guidance for the executors and personal representatives (PRs) of an estate containing cryptoassets, to ensure they are identified, managed and administered appropriately after death.
1. Discovering the cryptoassets of the deceased
Digital property cannot vest with the deceased’s PRs if it cannot be identified and accessed. There are currently around 18.5m Bitcoin in existence, and it is estimated that around 20 per cent of these (worth around $140bn) are ‘lost’ online, according to the cryptocurrency data firm Chainalysis. As discussed in this article, it is important that the details of any cryptoassets held by an individual are recorded in a secure inventory as part of the estate planning process. The inventory should include all passwords to access computing devices, all usernames for online accounts, and the public and private keys for cryptocurrency accounts.
Any owner of cryptoassets should ensure that the private keys are recorded in a secure format, such as a USB drive, and stored securely so that they can be accessed by the PRs of their estate. Without this information, the PRs will not be able to locate or access the crypto assets after the owner’s death and they are likely to be lost forever.
Tip: If the deceased has not left a digital inventory but PRs are aware that they held cryptoassets, the PRs could arrange for an expert to search the deceased’s computing devices for any cryptocurrency wallets and account details.
2. Taking possession of the cryptoassets
Once the details of the cryptoassets, including the addresses and private keys, have been located, the PRs can effectively take possession of them. A grant of probate is not always required.
Tip: However, if the deceased was using a third party provider (such as a custodian or other online wallet provider or crypto exchange) to hold the cryptocurrency, the provider will usually require a death certificate and grant of probate in the usual way in order to obtain access to the deceased’s account.
It is recommended that the PRs transfer the crypto assets to a new wallet or custodian controlled by them, with a new private key that only they know. This will secure them in case anyone other than the deceased was aware of their private key.
PRs should also take extreme care to securely store devices containing access information for cryptoassets. One recent cautionary tale involves James Howells, who accidentally threw out a USB drive containing bitcoin currently valued at over £200m. He has now obtained private equity backing to try to retrieve it from a local council landfill site, however Newport Council are denying permission to conduct the search, despite his promise of a £50m share if it is recovered!
Tip: If possible, PRs should check to confirm that the deceased did in fact hold the title to the cryptoassets before disposing of them, for example by finding evidence of the purchase, to ensure no one else has a better claim to the asset. Although a grant is not required to transfer or sell crypto, a grant does prove the PRs authority to administer the assets in the deceased’s estate.
3. Distributing cryptoassets
When the PRs have full possession of the cryptoassets in their own wallet or account, they can then transfer them to the relevant beneficiaries or sell them, in accordance with the terms of the deceased’s Will or the intestacy rules. However, the cryptoassets will be taxed in the normal way, as set out below.
Tip: To sell cryptocurrency, PRs should liaise with a specialist broker or transfer the cryptocurrency to an exchange (e.g. Coinbase). Provided the PRs have the public and private keys to access the crypto, they have control of the wallet and its contents – as there is no central body which oversees transactions, no other authority is needed (e.g. grant of probate, death certificate etc). Advice from an investment adviser with crypto experience is recommended before selling large quantities, just as PRs would take advice in relation to the sale of any other kind of investments. The cryptocurrency could also be transferred directly to the beneficiaries under the Will.
4. Tax on cryptoassets
In the recent policy paper ‘Cryptoassets: tax for individuals’, HMRC confirms that cryptoassets will be liable for inheritance tax on the death of the holder and capital gains tax on a valid disposal.
The policy paper sets out that that while an individual is UK resident, HMRC will treat their beneficially owned cryptoassets as located in the UK for tax purposes. This means inheritance tax will be due on their crypto, along with the other assets in their estate before a grant of probate can be obtained by the PRs.
Tip: PRs should check the details of any cryptoassets held abroad (in particular where the deceased’s crypto is held in a non-UK based exchange) to confirm whether they will be subject to inheritance tax.
From a capital gains tax perspective, HMRC also sets out that buying and selling cryptoassets will normally amount to investment activity. This means PRs will be liable for CGT on any gains that are realised on the disposal of cryptoassets.
Tip: PRs will have to work out the pound sterling value of the crypto being sold or distributed to each beneficiary and pay CGT on any gains. The value can be calculated using the rates provided by online cryptocurrency exchanges or aggregators at the time of the disposal.
Overall, cryptoassets are becoming increasingly common and it is important for PRs to know how to manage them correctly. Following the guidance in this article will help to ensure that cryptoassets end up securely in the hands of the beneficiaries of the deceased’s estate.
In the next article, we will look at trusts holding cryptoassets and the role of the trustee. If you enjoyed reading this, do take a look at these articles:
If you require further information about anything covered in this briefing note, please contact Caroline Vollers, or your usual contact at the firm on +44 (0)20 3375 7000.
This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.
© Farrer & Co LLP, July 2021