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Crypto-Tax Reform: Lending and Liquidity Pools
So far, apart from , the UK has not really seen any tax legislation dealing specifically with cryptoassets. Instead, it has relied upon existing tax laws, and guidance that attempts to apply these laws to the new possibilities thrown up by modern technology.
However, that will soon be changing, as the government has recently published draft legislation setting out two helpful changes to tax law, specifically in relation to cryptoassets.
This article sets out one of those changes, relating to loans and liquidity pools. The other change, relating to stablecoins, is covered in a separate article.
Capital Gains Tax on Cryptoasset Lending
Individuals may be subject to Capital Gains Tax (CGT) when they dispose of a cryptoasset. This might be because they have sold a cryptoasset, or gifted it to another person. However, the application of traditional English legal principles here means that a person will also be making a disposal (and therefore potentially triggering a CGT charge) when they make a loan of a cryptoasset.
This tax treatment is one that would come as a surprise to many taxpayers (and likely many of their advisors), and does not really reflect the economic reality of the transaction in which the lender expects to receive the same value of cryptoassets back at the end of the loan. Therefore, there have been calls for reform to address this point.
The government originally ran a call for evidence on this point back in 2022. Since then there have been a further consultation and various HMRC working groups, which Jack Burroughs of Quastels’ Private Wealth and Tax Team attended, as the details of the proposed reform were worked out.
What’s Changing
We now have draft legislation, which is due to form part of the Finance Bill and take effect from 6 April 2027 (although the government is still considering whether it should be made retrospective). It addresses this situation by means of a ‘no gain, no loss’ treatment.
The new law can be illustrated with a simple example:
- Alice enters into a contract with Bob, by which she transfers 100 ETH to him, in return for the return of 110 ETH in a year’s time; and
- After a year, Bob repays 110 ETH to Alice.
Under the current law, at the point of the initial loan, Alice would have been subject to CGT if the value of the ETH at that time was more than she had paid for it. However, under the new draft law, there will be no CGT at that point, since Alice is treated as having disposed of her ETH for the same price as she paid for it.
When Bob repays the 110 ETH to Alice, she is then disposing of her right to receive the repayment. The 100 ETH representing the original loan are received tax free. However, there will be CGT payable on the additional 10 ETH return, which is treated as Alice’s gain.
Of course, in practice many DeFi transactions will be a lot more complicated than this simple example. These include the deposit of cryptoassets into a smart contract liquidity pool, which is dealt with in a separate part of the legislation. There are also various conditions that must be met in order for the new rules to apply, including a ‘low-risk-of-loss condition’ and either the ‘unconnected parties condition’ or the ‘widely available condition’. Therefore, it will be important to take advice to properly understand how the rules apply to your own specific circumstances. The cryptoasset tax specialists in the Private Wealth and Tax Team at Quastels will be happy to help.
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Crypto-Tax Reform: Stablecoins
So far, apart from , the UK has not really seen any tax legislation dealing specifically with cryptoassets. Instead, it has relied upon existing tax laws, and guidance that attempts to apply these laws to the new possibilities thrown up by modern technology.
However, that will soon be changing, as the government has recently published draft legislation setting out two helpful changes to tax law, specifically in relation to cryptoassets.
This article sets out one of those changes, relating to stablecoins. The other change, relating to loans and liquidity pools, is covered in a separate article.
Stablecoins and Capital Gains Tax
At present, stablecoins sit in a slightly odd position tax-wise. People very commonly acquire stablecoins pegged to the value of a foreign currency (most usually USD). In most cases foreign currency held by an individual will be exempt from Capital Gains Tax (CGT), either because it is held in a foreign currency bank account, or because it is physical cash acquired for personal spending.
However, the existing exemptions do not necessarily apply to stablecoins. This means that if you purchase stablecoins denominated in a foreign currency, and then by the time you spend them that foreign currency has increased in value relative to GBP, you would have made a taxable gain.
This might mean that a person could have a CGT liability on their stablecoin transactions, and even if they do not, it would still be extremely burdensome to have to try to keep track of gains and losses without specialist software. There is therefore the risk that people will either (1) be entirely unaware of the CGT issues; (2) deliberately choose to ignore the CGT issues; or (3) be deterred from using stablecoins as a form of payment due to the tax complications.
The government has recognised this problem and earlier this year ran a call for evidence. Jack Burroughs of Quastels’ Private Wealth and Tax Team provided comments to this on behalf of the Society of Trust and Estate Practitioners (STEP).
We can now see the draft legislation that is due to form part of the next Finance Bill and take effect from 6 April 2027. This will have the effect of making eligible stablecoins exempt from CGT.
In order to be classed as an eligible stablecoin, the requirements are that:
“it is reasonable to assume that—
(a) a sufficient amount of any currency or other assets are held for the purposes of it maintaining a stable value in relation to sterling or another currency, and
(b) it is designed to be used as a means of payment or settlement.”
In addition, the stablecoin must be widely available.
Note that the definition deliberately only includes asset-backed stablecoins, and therefore algorithmic stablecoins would not qualify for this exemption.
Stablecoins and Income Tax
In addition, the legislation will address another oddity of stablecoin taxation, by treating a return in stablecoins paid in connection with a cryptoasset debt as being interest.
At present, if Alice lends $10,000 worth of USDC to Bob, and Bob agrees to pay Alice back $10,500 worth of USDC after a year, additional $500 of USD would not be classed as interest, but instead taxed as miscellaneous income. However, under the new rules, it will be taxed as income.
Tax law might gradually be catching up with the modern day, but there’s no sign that it’s going to get any less complicated. If you’re transacting in cryptoassets and would like to understand your tax position, the cryptoasset tax specialists in the Private Wealth and Tax Team at Quastels will be happy to help.
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Don’t Let the London Social Season Cost You More Than Your Summer Wardrobe: UK Tax Residence Considerations
No city does summer quite like London. From Royal Ascot and Wimbledon to the Chelsea Flower Show, Henley Royal Regatta, Glyndebourne and the Goodwood Festival of Speed, the city’s social calendar from June to August is non-stop. For those whose lives span multiple time zones and whose summers follow the international social circuit, London is rarely a single trip – it is a series of events, extended stays and spontaneous decisions to stay on just a little longer. It is worth being aware, however, that spending time in the UK carries tax implications that are easy to overlook. Stay long enough, and HMRC may consider you a UK tax resident, with consequences that extend well beyond a hotel bill.
The rules are more objective than many people realise. Under UK tax law, residence is not a matter of personal choice, formal declaration or immigration status. It is determined by a structured set of statutory rules, and once a threshold has been crossed in a given tax year, the position cannot be undone retrospectively.
Understanding where you stand before you travel, or before extending your trip, is therefore crucial to avoid inadvertently becoming UK tax resident.
So how does the UK determine tax residence?
Since 6 April 2013, UK tax residence has been determined under the Statutory Residence Test. The Statutory Residence Test is a structured framework that applies each tax year (running from 6 April to 5 April) and works through a series of tests in sequence.
The starting question is whether you meet an automatic overseas test, which would confirm you are not UK resident without needing to go further. If you do not, the test moves to whether you meet an automatic UK test, which would confirm you are UK resident. If neither automatic test applies, your residence is determined by the sufficient ties test, a more nuanced calculation that takes into account both how many days you spend in the UK and how many connecting factors (called “ties”) you have to the country.
The key day-count thresholds
Spending 183 or more days in the UK in a single tax year will make you automatically UK tax resident, regardless of any other circumstances. Below that day count, the position depends on how connected you are to the UK.
HMRC looks at a set of factors, known as “ties”, such as whether you have family living here, whether you have access to accommodation in the UK, or whether you have spent significant time here in previous years. The more ties you have, the fewer days it takes to become resident.
For those who have been non-resident throughout the three prior tax years, the threshold ranges from as many as 182 days for those with minimal UK connections down to 45 days for those with the maximum number of ties. For those who have been UK tax resident in the three prior tax years, the day-count tightens further at each level of connection, to as few as 15 days for the most connected individuals.
For those who work full-time overseas, the Statutory Residence Test contains a specific automatic overseas test which, if met, overrides the sufficient ties thresholds altogether, potentially increasing the number of days that can be spent in the UK even for the most connected individuals. The conditions are specific and advice should be taken if you think this test may be relevant.
How days are counted and why it matters
A day counts for the Statutory Residence Test purposes if you are in the UK at midnight. Although it is worth noting that the Statutory Residence Test contains specific anti-avoidance provisions targeting those who seek to manage their day count by departing the UK before midnight.
This means that even a short stay, such as arriving one afternoon and leaving the following morning, counts as a day. For individuals with a busy international schedule, the risk of an inadvertent overcount is very real.
Days accumulate quickly across a season of events, and the relevant day-count thresholds can be reached faster than expected.
A public life leaves a public trail
For those who live publicly, and whose movements are routinely documented and visible online, day counting is not just advisable, it is essential. Tax authorities do not rely solely on self-declaration or formal filings. They have access to a wide range of third-party data, and in an era where so much of daily life is recorded digitally, the ability to reconstruct where someone has actually been has never been greater.
The approach taken by French tax authorities in recent months offers a striking illustration. In scrutinising the residency claim of French international footballer Samir Nasri, who maintained that he was tax resident in Dubai, the French authorities drew on lifestyle data, including travel patterns and food delivery orders, to challenge his declared position and establish that he was, in substance, spending sufficient time in France to be regarded as a French tax resident.
HMRC operates with comparable capabilities. The UK’s tax authority has extensive data-gathering powers to verify residence claims. For internationally mobile individuals with a visible online presence, publicly available content, location tags and digital activity can all form part of the picture that a tax authority constructs.
An accurate, contemporaneous record of where you actually were is far more persuasive than one reconstructed at the end of the year, and far more reliable than assuming that a declared address will go unchallenged.
What are the consequences of inadvertent UK tax residence?
If you become UK tax resident in a given year, you become liable to UK tax on your worldwide income and gains for that year, not just income arising in the UK.
For those who are based in lower-tax or no-tax jurisdictions and have not previously engaged with the UK tax system, early awareness is particularly valuable. Once the relevant day count threshold has been crossed in a given tax year, unless limited exceptional circumstances apply, it cannot be reversed. This means that income, or capital gains, none of which may have been taxable at home, could fall within the scope of UK tax if UK residence is established.
There is, however, one important source of potential relief worth noting. Where an individual becomes UK tax resident part way through a tax year, split year treatment may apply. If available, this allows the tax year to be divided, so that liability to UK tax on worldwide income and gains arises only from the point at which UK residence begins, rather than for the full tax year. Whether split year treatment is
available depends on the individual’s specific circumstances, but where it does apply, it can materially limit the scope of the exposure.
What should you do?
Planning ahead is the most effective approach. If London is a regular part of your year, whether for the social season, for a series of events, or simply because you enjoy being here, there are three practical steps worth taking:
- Track your days:
Keep a running record of every date you are in the UK. Your phone’s location history and travel bookings are a useful starting point, but a dedicated log updated as you go is the most reliable approach. Do not rely on memory or a rough estimate at the end of the year.
- Know your ties:
The test is not just about days, it also turns on whether you have certain connections to the UK. An accommodation tie is one of the most commonly overlooked. A family tie, a work tie, or a history of spending significant time here in previous years can all shift the threshold at which you become resident.
- Get advice before you approach the relevant threshold:
Depending on your prior history and connections to the UK, the point at which residence becomes a risk could be as low as 15 days. The London social season is one of the highlights of the international calendar, and with a little preparation, and by taking advice before you cross your relevant threshold, it need not bring any unwelcome tax consequences.
To discuss any of the points raised in this article, your circumstances, and how we can help, please get in touch.
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