Digital assets are an example of how the perception of what might constitute a good investment can vary significantly between generations.
Some owners of digital assets, including cryptocurrencies and non-fungible tokens, take a long-term view and believe the real value may only really be known after their lifetime.
More and more owners of digital assets are therefore starting to consider how they can pass the assets on as part of their succession planning.
Succession planning for digital assets raises a range of identification and ownership issues because assets held on a blockchain protocol are, by their nature, decentralised with no central register of ownership evidencing title, as is the case with land or shares for example.
Ownership of a crypto asset relies upon possession of the 256-character-long binary or 64-digit hexadecimal codes, known as the digital ‘keys’ that are needed to unlock a digital wallet and access the assets.
From a legal perspective, this creates difficulties in identifying and tracing the legal and beneficial ownership, particularly on death.
Problems proving ownership
Whoever holds the key to the wallet controls the asset – and to that extent it is similar to cash or other bearer instruments.
HMRC takes the view that the holder of the keys is the owner, and the tax status of the asset is based on the tax residence of the key-holder.
HMRC considers that blockchain tokens, be that cryptocurrency or NFTs such as digital artwork, are intangible assets that HMRC confirms can be held as taxable investments.
Governments and tax authorities seeking international transparency of ownership have therefore struggled with how to effectively regulate the trading of digital assets.
They cannot rely upon large financial institutions to enforce international reporting standards, as financial institutions are not required in blockchain transactions.
Indeed, removal of the middleman has been heralded as one of the advantages of blockchain technology and the decentralised economy.
When someone dies, their executors have a legal duty to collect in and make an account of the deceased’s assets.
The majority of elderly people dying today will never have held digital assets. However, it is estimated that around 5mn people in the UK now own some form of crypto asset, and owners are principally the younger generations.
On death, the crypto assets can only be accessed by having the digital keys. The potential for executors to be unaware of these assets being held, and indeed never finding them, is very real.
For beneficiaries of deceased estates, large sums could be lost as a result, without any intentional wrongdoing by the executors.
What are the tax implications?
The legal issues quickly become complicated.
Consider a situation where digital keys are recovered several years after death. The executors may have long since finalised the estate administration and distributed the assets. When the assets are recovered, the executors must ascertain the value of the crypto assets at the value immediately before death.
