HMRC issue one to many letters prompting inheritance tax (IHT) compliance

For IHT purposes, the location of cryptoassets is determined by general principles applicable to private property. Where a cryptoasset represents an interest in an underlying asset, the location of the underlying asset is key. For exchange tokens (such as Bitcoin), HMRC considers the location to be where the beneficial owner is resident. Where the cryptoasset is a digital representation of a beneficial interest in an underlying asset (for example, a gold bar) the location of the underlying asset will determine the location of the cryptoasset. This means that the person holding exchanges tokens is liable to pay UK tax if they are a UK resident as defined by the Statutory Residence Test. If the tokens are co-owned by two or more beneficial owners then each beneficial owner’s interest in the asset will be where that beneficial owner is resident. Where Double Taxation Agreements (DTA) do not determine the location of the cryptoassets, (which is common due to the DTA being ratified before cryptoassets existed) then common law principles apply. Agents should check whether they have included cryptoassets sited offshore but whose beneficial owner is resident in the UK.

Problems can arise where the private key to a cryptoasset has not been passed on or has been lost. In such cases, although the tokens continue to exist on the distributed ledger, they cannot be accessed. Importantly, this situation does not constitute a disposal for capital gains tax purposes. HMRC’s manuals indicate that a negligible value claim may be accepted if it can be demonstrated that there is no realistic prospect of recovering the private key or accessing the assets. Additionally, personal representatives may encounter situations where the value of the cryptoasset decreases after the date of death. This could result in the estate being liable for IHT based on the higher value at the date of death, even though the IHT400 is submitted, and the tax becomes due at a later date when the asset’s value has fallen.

HMRC are asking agents to check with their clients, including estates' personal representatives, to confirm whether they hold any cryptoassets and to make sure IHT returns contain details of those cryptoassets on the IHT400. If agents find that a previous IHT return is incorrect, the agent or personal representative will need to amend it using form C4 and quote ‘OTM000752’ in the cover letter with the corrective account. Where cryptoassets are held in trusts, it would be prudent to check how cryptoassets have been treated and whether there are any exit charges due and whether the IHT paid at the last 10-year anniversary computations were correct.

HMRC cannot impose a penalty on the personal representative of the deceased for offences committed by the deceased before the date of death because deceased persons are presumed to be innocent and a criminal charge cannot be inherited. HMRC must not impose penalties on the personal representatives if all of the following circumstances apply:

• the penalty is of the type that are classified as ‘criminal’ in nature for the purposes of the European Convention on Human Rights but where they are not criminal for domestic purposes and they remain civil penalties. Penalties which are treated as if they are ‘criminal’ include all tax geared penalties where HMRC need to establish the person’s behaviour. This includes for example, carelessness; 
• it is necessary to establish the persons behaviour for them to be liable to a penalty, or that they did not have a reasonable excuse, and
• they would have been personally liable for the penalty.

Where an individual held cryptoassets on their death, it is possible that prior to their death they may have bought and sold other cryptoassets and not paid the capital gains tax due on those transactions.  Personal representatives are responsible for the historic tax errors of a deceased person and they, together with agents, should check whether the deceased's previous declarations to HMRC were correct. 

HMRC have specific time limits to raise assessments against the personal representatives for unpaid tax which vary based on the circumstances and the behaviour of the deceased. For reasonable care and careless behaviour HMRC’s assessments are restricted to the prior 4 and 6 years respectively but they must raise their assessments within 4 years after the end of the tax year in which the death occurred. Where there has been deliberate behaviour of fraud or evasion by the deceased then HMRC can recover tax going back 20 years however they must still make assessments within 4 years after the end of the tax year in which the death occurred and the burden of proof for establishing the deceased’s deliberate behaviour rests with HMRC.

Where there is unpaid tax on cryptoassets (including exchange tokens, non-fungible tokens (NFTs) and utility tokens) agents and personal representatives can make use of HMRC’s online specific cryptoasset disclosure facility using the government gateway. The taxpayer’s identifying information together with information on how many cryptoasset exchanges were used in a given tax year and how many types of cryptoassets were bought or sold in the year will need to be reported. The disclosure requires the agent or personal representative to calculate the tax payable each year.

From January 2026 the new rules under the OECD’s Cryptoasset reporting framework (CARF) requires UK reporting cryptoasset service providers to collect information (such as their name, address, date of birth, tax residence, National Insurance number or unique tax reference number together with a summary of their cryptoasset transactions) on an annual basis. This mandatory reporting of this information is set to begin in 2027 and the data collected will be used to tackle tax evasion, avoidance and help taxpayers (through prompts from HMRC and cryptoasset service providers) to meet their tax obligations.