Bitcoin Inheritance Tax UK — HMRC Rules

How HMRC Classifies Cryptocurrency

HMRC does not consider cryptocurrency to be currency, despite the name. It classifies crypto assets as property — in the same category as shares, art, or real estate. This classification has significant implications for how Bitcoin is taxed when it is inherited.

The key guidance comes from HMRC’s Cryptoassets Manual, which states that crypto assets are treated as property for tax purposes and are subject to the same rules as other property holdings within an estate.

Inheritance Tax Basics

Inheritance Tax (IHT) is charged at 40% on the value of an estate above the nil-rate band. The current thresholds are:

Nil-rate band: £325,000 — the first £325,000 of an estate is tax-free
Residence nil-rate band: An additional £175,000 if the estate includes a home being passed to direct descendants
Combined maximum: £500,000 per individual before IHT applies

For married couples and civil partners, any unused nil-rate band can be transferred to the surviving partner, effectively doubling the threshold to £650,000 (or £1,000,000 with the residence nil-rate band).

Transfers between spouses and civil partners are completely exempt from IHT, regardless of value.

Valuing Bitcoin for IHT

The value of cryptocurrency for inheritance tax purposes is based on the market price at the date of death. This creates several practical challenges.

Volatility. Bitcoin’s price can move 10-20% in a single day. The valuation date is fixed by law, but the actual distribution of the estate may happen months later. Executors may need to sell Bitcoin to pay the tax bill, and the value at the point of sale could be significantly different from the value at the date of death.

Multiple assets. If the deceased held multiple cryptocurrencies across multiple wallets and exchanges, each needs to be valued separately at the date of death. Historical price data from reputable sources (CoinGecko, CoinMarketCap, or exchange records) should be used.

Lost or inaccessible Bitcoin. If the deceased’s Bitcoin is provably lost — for example, if the private keys have been destroyed — there is an argument that the asset has no value for IHT purposes. However, HMRC has not published definitive guidance on this point, and executors should seek professional advice before claiming a zero valuation.

Capital Gains Tax on Death

When a person dies, there is no capital gains tax (CGT) event. The beneficiaries inherit the assets at their market value on the date of death. This is known as a “free uplift” in the cost base.

This means:

If the deceased bought Bitcoin at £5,000 and it was worth £50,000 at death, the beneficiary inherits it with a cost base of £50,000
If the beneficiary later sells the Bitcoin at £60,000, they pay CGT only on the £10,000 gain (not on the £55,000 gain from the original purchase)
The CGT annual exempt amount (currently £3,000 per year) can be used to offset gains

This uplift can represent a significant tax saving compared to gifting Bitcoin during one’s lifetime, where the recipient inherits the original cost base and may face a much larger CGT liability on sale.

Reporting Requirements

Executors are required to report the value of all assets in the estate to HMRC, including cryptocurrency. This is done through the inheritance tax return (form IHT400 for estates above the nil-rate band).

Key reporting considerations:

Full disclosure — all cryptocurrency holdings must be declared, including those held on exchanges, in self-custody wallets, and in any other form
Valuation evidence — keep records of the price sources used for valuation
Exchange records — request transaction histories from exchanges, as these may be needed to establish the deceased’s holdings
Self-custody wallets — if the executor can access the wallets, take screenshots of balances at or near the date of death

HMRC has been increasing its focus on cryptocurrency compliance. Failure to disclose crypto assets in an estate could result in penalties.

Paying IHT on Crypto Assets

IHT is normally due within six months of the end of the month of death. This creates a practical problem for crypto-heavy estates: the executor may need to sell Bitcoin to pay the tax bill, but they may not yet have access to the cryptocurrency.

Options include:

Selling Bitcoin — if the executor can access the crypto, they can sell enough to cover the IHT liability. Be aware that exchange withdrawals and bank transfers take time.
Instalment payments — HMRC may allow IHT to be paid in instalments over 10 years for certain types of property. However, this relief is typically available for land, property, and business assets, and it is unclear whether cryptocurrency qualifies.
Borrowing — the estate may need to borrow funds to pay the IHT bill while waiting for the crypto to be liquidated.
Direct payment from non-crypto assets — if the estate has sufficient cash, property, or other liquid assets, these can be used to pay the IHT on the crypto holdings.

Trusts and Tax Planning

Some Bitcoin holders use trusts to manage their inheritance tax position. Common structures include:

Discretionary trusts — the trustees decide how and when to distribute assets to beneficiaries. These can provide flexibility but attract a periodic IHT charge every 10 years.
Bare trusts — the beneficiary has an absolute right to the assets. These are simpler but offer less flexibility.
Life interest trusts — one beneficiary receives income during their lifetime, and the capital passes to another beneficiary on their death.

Trusts add complexity and cost, and the tax advantages are not always straightforward. Professional advice is essential.

Common Pitfalls

Failing to disclose crypto. Executors who are unaware of the deceased’s crypto holdings may submit an incomplete inheritance tax return. HMRC can impose penalties and interest if crypto assets are discovered later.

Using the wrong valuation date. The valuation date is the date of death, not the date of probate or the date of sale. Using the wrong date can result in an incorrect tax return.

Ignoring exchange-held crypto. Bitcoin held on exchanges is still part of the estate. Executors should check the deceased’s email for exchange account confirmations and any 2FA device for authenticator apps.

Assuming lost Bitcoin has no value. Even if private keys appear to be lost, HMRC may argue that the Bitcoin still has value if there is any possibility of recovery. Seek professional advice before claiming a nil valuation.

Disclaimer

This guide provides general information about UK inheritance tax as it applies to cryptocurrency. Tax rules change frequently and individual circumstances vary. Always consult a qualified tax adviser for guidance specific to your situation. This is not tax advice.

Bitcoin Probate in the UK — The full probate process for cryptocurrency estates.
Bitcoin Inheritance Planning (UK) — A step-by-step estate planning framework for UK holders.
Finding a Crypto-Literate Solicitor — How to find a solicitor who understands HMRC’s treatment of crypto.
Crypto Will Writing Guide — How to structure your will to cover digital assets properly.
Mt. Gox: 850,000 Bitcoin Vanished — What happens when exchange-held crypto is lost on a massive scale.

Bitcoin Inheritance Tax (UK)