When Can Trusts be a Good Tax Planning Tool for Crypto Investors?
Despite a degree of recent global economic turbulence having a somewhat noticeable impact on cryptocurrency markets, investment in cryptocurrencies, blockchain technology and other related digital assets continue to remain popular amongst UK investors. In fact, data shows that between 2018 and 2021, crypto transactions and adoption in the UK increased by as much as 650%, from 1.5 million to 9.8 million active investors.
Just as with traditional investments, most cryptocurrency holders will be looking to protect the wealth earned from accumulated assets to be passed onto future generations or otherwise managed by a chosen estate. Though at present, cryptocurrencies are not taxed in the way traditional assets are and have specific tax considerations and tax reporting requirements.
Whether you’re wondering how to start investing in cryptocurrency or are already in possession of a healthy portfolio, financial advisers recommend that asset holders consider actions like inheritance tax planning trusts sooner rather than later to help protect accumulated wealth from avoidable taxation.
This guide will explain how HMRC views cryptocurrencies in terms of taxable assets, how investors can navigate UK practices to minimise tax liabilities relating to crypto assets, as well as outline the most effective types of trusts and estate planning procedures UK crypto holders should consider for tax purposes.
What is tax planning?
Before outlining the ways in which crypto investors can protect their assets using trusts and other related protections, it’s wise to understand what is meant by the term tax planning. In short, personal tax planning involves analysing a person’s financial assets (in this case cryptocurrencies) to deduce how HMRC is permitted to tax gains and use this to create a plan allowing the holder to pay the lowest possible amount.
When investing in cryptocurrency, tax planning should form an essential aspect of all long-term financial plans, as a reduction in tax liability facilitated through these actions will ultimately contribute to a greater amount of earnings able to be paid into accounts like retirement and inheritance funds.
At present, HMRC does not view crypto assets as comparable to currency or money, meaning that all profits and financial gains gleaned from buying or selling crypto will be considered as taxable. In addition, cryptocurrencies are classed as property by HMRC in terms of inheritance tax, meaning they will form part of any taxable estate and contribute to the £325,000 threshold used to calculate inheritance tax.
Identifying crypto assets
To ensure that all taxable crypto assets are appropriately accounted for and factored into tax implications, investors must clearly outline where their assets are held as well as their financial value. Any assets stored exclusively online in protected wallets can be difficult for financial advisors to locate, though if they are uncovered after death, any retroactive tax applied can affect previous tax planning efforts.
Additionally, UK tax law states that any resident who pays tax in the UK will also be required to pay tax on the disposal of crypto assets, regardless of whether said assets were purchased through an offshore exchange or bank account. In layman's terms, any capital gains taxes applicable to the disposal of crypto assets cannot be legally avoided so long as the holder is considered a tax resident in the UK.
Types of cryptocurrency investment trust
Choosing to transfer accumulated crypto assets into a trust can be incredibly effective in terms of inheritance tax planning, primarily as doing so will offer a range of exemptions on certain types of assets as well as act to protect any income or capital gains tax generated over time from inheritance tax.
When establishing a trust, asset holders are able to outline how funds are to be disbursed after their passing as well as decide which beneficiaries are to receive said funds. A well-executed trust will also add a degree of asset protection, for example, any crypto assets stored within a trust will be exempt from taxation or creditors should the holder experience any serious financial hardship during their lifetime.
When selecting the most appropriate type of trust in which to store crypto assets, holders should discuss their plans with a financial advisor or estate planner to ensure that the option chosen can facilitate what they wish to achieve. In most situations, investors will be presented with four main options, including:
Bare trusts
Assets stored in a bare trust are held in the name of the trustee, though the beneficiary will retain the right to all capital and income generated by held assets which they will be permitted to access at any time provided they are aged 18 or over (16 in Scotland). This type of trust is generally used to pass assets on to young people as a form of inheritance, with the trustee controlling the assets until the beneficiary becomes a legal adult
Interest in possession trusts
Assets stored in this type of trust are controlled by the trustee, though all income generated will be passed on to the beneficiary as it arises. All income paid through the trust will be taxable once received like income tax, though the assets themselves will remain protected and inaccessible to beneficiaries so long as the trust is still active
Discretionary trusts
When operating a discretionary trust, the trustee is able to decide how all generated income is used and, in some cases, the capital itself. This will typically include what gets paid out, who is to be paid, how frequent payments should be, as well as any extra conditions imposed on beneficiaries to provide some financial help to inheritors
Mixed trusts
This describes a combination of two or more trusts in which the different parts of each trust will be taxed according to specific rules, typically these trusts will be used to cater for a particular set of circumstances, such as inheritance for children of different ages
How to transfer cryptocurrency to a trust
Transferring cryptocurrency into a trust is a relatively simple process, though a financial advisor or estate planner will be required to set up the trust on behalf of the asset holder. A legal arrangement will be drawn up in which the asset holder will be able to set specific rules outlining how stored assets are to be used and distributed to a chosen number of beneficiaries.
As with any legally binding document, the wording used to describe a cryptocurrency investment trust must be carefully considered. At least two trustees will be required to oversee the management of the trust, with at least one of these individuals being knowledgeable in the handling of cryptocurrencies, including how to access wallets, navigate exchanges and understand the workings of crypto markets.
With these factors outlined carefully in a legally binding document, all crypto assets can be transferred to the trust by a preappointed financial advisor with the described rules being immediately applied.
Is it worth investing in cryptocurrency UK?
Though some investors may view crypto asset investments as a potentially volatile asset, the UK government’s plans to regulate the crypto market, classify stablecoins as a recognised form of payment and drive the UK towards becoming a global crypto asset technology hub should act as clear indicators that investing in crypto will remain worthwhile for investors that possess a good understanding of the crypto market.
Provided that asset holders take the time to consult with financial advisors and estate planners to gain a clear picture of UK practises and guidelines for crypto tax treatment, the formation of a well-executed trust can have tax benefits as well as protect any income earned from crypto assets in order to strengthen both retirement and inheritance funds for asset holders as well as their chosen beneficiaries.
There’s a reason why trusts often factor in to how the wealthy are planning tax reductions and ensuring that their assets are protected from avoidable charges, though unlike some resources, the formation and execution of a trust is easily accessible to investors from all backgrounds to consider as part of an effective tax planning process.
