When you make a gift of cryptocurrency this transaction is a taxable event. However there are ways of gifting crypto tax efficiently in order to avoid a tax liability.
Overview
Making a gift of crypto can be a powerful tool for wealth management and succession planning. Especially, if you consider Bitcoin will increase in price dramatically long term and be a future store of value. However, it's essential to understand the tax implications involved—particularly when it comes to Capital Gains Tax (CGT) and Inheritance Tax (IHT). In this blog post, we’ll explore the key UK tax considerations when gifting crypto assets.
Why is a gift of crypto taxable?
When you make a gift of crypto to someone who is not your civil partner/spouse the tax rules can deem you to be connected. What's more, this is especially relevant where you are want to gift crypto to your children. Consequently, the capital gains tax connected person rules apply to these type of transactions.
Where these rules apply, you are deemed to dispose of your crypto at it's market value on the date of the gift, regardless of whether any consideration received. As a result you could unknowingly incur a capital gains tax liability on a gift of crypto.
Example
Henry buys 1 Bitcoin for £10,000 and when the market value is £30,000 decides to gift it to his son Matthew. A capital gain of £20,000 arises which is subject to CGT.
Using Holdover relief to avoid a capital gain on a gift of crypto
What is Holdover Relief?
Capital Gains Holdover Relief may be available when you make a gift, or a transfer at undervalue, to a trust.
The effect of claiming the relief is that you do not pay any tax on disposing of your asset but passes on the gain to the donee. The capital gain deducted from their base cost. If there is a partial gift, with some form of consideration received, the relief will be restricted.
There is a specific form of capital gains tax Holdover Relief that applies to any transfers that are immediately chargeable to IHT, or would be but for an exemption or the IHT Nil Rate Band. Typically this will include most transfers to and from trust.
Additionally, in order to qualify, both the transferor and transferee must be either an individual or trustees of a settlement.
Are there any restrictions?
It's not possible to claim Holdover Relief for gifts made in the following circumstances:
Additionally, there are claw back provisions for gifts to Trusts which subsequently become settlor-interested and for Individuals where the donee emigrates within six tax years
How to claim Holdover Relief
You'll need to make a joint election using the form on HMRC help sheet HS295 by the donor (giver) and donee (person receiving the gift), unless either:
Equally importantly, claims must be made within four years of the end of the tax year of assessment (5 April). For example, if you make a gift in the 2024/25 tax year you'll need to submit an election by 5th April 2029.
Record Keeping and Valuation
Due to the volatility of crypto, it's vital to have an accurate valuation at the date of the gift. What's more, HMRC will expect robust evidence of how the value was determined. Therefore, this should ideally based on a reputable exchange rate at the time of transfer.
We'd also recommend keeping detailed records of the date and time of the gift, amount and type of crypto gifted. Additionally, it is prudent to have the wallet addresses involved and the valuation method used
Practical considerations
You should ensure the trust deed is appropriately drafted to accept and manage crypto assets.
Furthermore the Trustees must be comfortable with handling digital assets, including security, storage, and potential tax reporting obligations.
Summary
Gifting cryptocurrency to a trust can be a valuable estate planning tool, though it involves navigating complex tax rules. At the moment, UK tax law currently treats transfers of crypto by individuals as disposals for CGT purposes and potentially chargeable transfers for IHT. W
With the added complexity of crypto’s volatility and HMRC’s evolving stance, it’s essential to proceed carefully with this type of transaction.
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