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Digital Assets: Some Long-Awaited Clarification on the Thingness of Things
Most people in their daily lives do not pay attention to the law of personal property in England and Wales. However, for those of us who do, the parliamentary progress of the Property (Digital Assets etc) Bill has been a source of some excitement. The Bill is a welcome clarification of the law in this area, but at first glance its impact isn’t obvious. This blog therefore considers why the Bill was introduced, what it does, and what it does not do.
Short But Sweet
The Property (Digital Assets etc) Bill runs a total of two sections. The first section reads simply: “Objects of personal property rights
A thing (including a thing that is digital or electronic in nature) is not prevented from being the object of personal property rights merely because it is neither—
- a thing in possession, nor
- a thing in action.”
The second section limits the impact of the change to England and Wales, and Northern Ireland.
But Why?
For those not familiar with the details of English property law and recent debates around digital assets, this might at first glance seem like quite a puzzling provision. However, in the context of the current state of the law, it makes a lot of sense.
Essentially, the Bill sets out to override a famous statement by Fry LJ in the 1885 case of Colonial Bank v Whinney: “All personal things are either in possession or action.” This itself might require some translation. By ‘personal things’ Fry LJ was referring to the division in English property law between ‘real property’ (i.e. land and buildings) and ‘personal property’ (i.e. everything else). He was saying that personal property included ‘things in possession’ (i.e. tangible property, that you can physically possess) and ‘things in action’ (i.e. legal rights that you can enforce against another person, such as a debt), but nothing else.
In 1885 this was not really a problem, but unfortunately Fry LJ would never have the opportunity to discover cryptoassets, which didn’t really take off until Satoshi Nakamoto launched Bitcoin in 2009.
Cryptoassets are clearly not a form of tangible property. However, unlike previous forms of intangible assets that have been recognised as subject to property rights, it isn’t possible (at least in the simple case of an exchange token like Bitcoin) to identify any legal right enforceable against another person. It therefore isn’t really possible to say that cryptoassets typically are a thing in action.
This has presented a difficulty for those who seek to assert property rights in their cryptoassets, such as when their tokens have been stolen and they seek to recover those tokens. Situations like this have given rise to a number of claims in the last few years, and the courts of England and Wales have generally been open to the possibility that cryptoassets could be the object of property rights. However, Fry LJ and his famous quotation have continued to loom over the debate, and therefore when the Law Commission of England and Wales considered the topic, they recommended that the government eliminate any remaining confusion by passing legislation in the form of the current bill.
What It Means, and What It Doesn’t Mean
It’s important to notice that the legislation is drafted entirely in the negative. That is, it states that a failure to fit into the two existing categories is not a reason for something to not be the object of personal property rights. However, it deliberately does not state that any particular thing is in fact a type of personal property.
Clearly there will still need to be some limiting factors to determine the boundaries of personal property. After all, it isn’t possible to claim legal rights in a joke, or a fact, or a colour in the abstract. The law has recognised various criteria for property rights, but a significant one is that things must be ‘rivalrous’. That is, the use of a thing by one person necessarily prejudices the ability of another person to make equivalent use of it at the same time.
Therefore, you can own a diamond ring, because if you are wearing it then no-one else can also be wearing it at the same time. Similarly, rivalrousness is key to the design of systems like Bitcoin. You can own a given value of Bitcoin, because if you transfer it to another person’s address, no-one is now able to spend that specific value of Bitcoin other than somebody who controls the private key to that address. However, you cannot own pure information, because it is not rivalrous. If I tell you a joke, then you can pass it on to somebody else, without limiting my ability to tell it to others.
Therefore, just because the Bill will remove one reason why things could not be personal property, that does not mean that anything and everything will become personal property. This is a point that has been overlooked in some of the reactions to the Bill.
Confusion on this point can be forgiven. The name of the Bill refers to ‘digital assets’, a term which is perhaps unhelpfully broad and is used to describe anything from cryptoassets to the files on a computer. The Bill is however not intended to make all types of digital asset the object of property rights, as its explanatory notes make quite clear. Therefore, each variety of digital asset will need to be considered on its own merits to determine whether it is a form of property.
In the case of many cryptoassets, there is already a body of case law determining that they meet the necessary criteria and so can be the object of property rights. It therefore seems quite clear at this point that Bitcoin can be owned, and the Bill will remove any remaining doubt.
However, in the case of other digital assets, the position is much more uncertain. Digital files, for example, are not generally understood to be rivalrous. After all, if I email you a copy of a digital photo, then I still have the photo saved on my computer, and I can still look at it and copy it to other people. While there are some interesting conceptual arguments to the contrary, the conventional view remains that digital files cannot be the objects of property rights, and the Bill will not change that.
The Digital Estate
The question whether something can be the object of property rights has significance in various different contexts. One of these is in relation to the law of succession. Therefore, it is quite appropriate to make a Will leaving your cryptoassets to a chosen beneficiary. (That by itself is of course not sufficient, as you need to have a system in place for the chosen beneficiary to gain access to the necessary private keys- but that is a topic for another day.) However, you should not expect a gift in a Will of digital files to be legally enforceable. You can, and should, think about how you want your digital files to be handled after you are gone, but a Will is not a solution to this problem.
When it comes to digital assets, Quastels are the firm to turn to. Within the Private Wealth and Tax team, Ben Rosen TEP, Partner, and Jack Burroughs TEP, Senior Associate, are leading experts on the topic. Whether you need advice on the taxation of cryptoassets or help with your estate planning for cryptoassets or indeed for other types of digital asset, the team will be happy to help.
To discuss your circumstances and find out how we can help, please get in touch.
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No Ordinary Field Day: The Future of Farms and Inheritance Tax
With changes to crucial Inheritance Tax (IHT) reliefs due to come into effect next year, it has never been more important for landowners and business owners to take advice on their tax and succession planning.
The government has announced plans to cap the 100% rate of agricultural property relief (APR) and business property relief (BPR) at £1 million, combined, per person. For more details on how these proposed changes will work, see our previous article.
There have always been complicated issues that arise in ensuring that assets will qualify for APR or BPR. However, having confirmed that the reliefs apply, it has often been unnecessary to think too much further about IHT planning. In many cases the most tax-efficient approach has been to hold onto assets until death.
Once APR and BPR are capped, there will be a lot more to think about. From what we know so far of the government’s plans, there are going to be traps for the unwary as well as opportunities to maximise the value of the reliefs. Those with land and business interests will need to make sure they take expert advice on their IHT planning.
Making the most of the allowances
Since the introduction of the Transferable Nil Rate Band in 2008, it has often been appropriate to leave the whole of one’s estate to one’s spouse or civil partner. However, the government’s announcement of the changes stated that “any unused allowance will not be transferable between spouses and civil partners”.
Assuming that this position is carried forward into the coming legislation, this marks a return to the ‘use it or lose it’ principles of pre-2008. Anyone with significant relievable assets will want to make sure that their Will is structured appropriately. This could mean gifts direct to the next generation, or in some cases trusts will be a useful way to achieve your goals in a tax-efficient way.
Lifetime gifts
The current rules mean that where assets qualify for full IHT relief, it usually makes sense to retain them until death, when they can pass without capital gains tax (CGT). Beneficiaries can inherit the assets with an uplift to their probate value. Since lifetime gifts of relievable assets typically do not save IHT, but either trigger an immediate CGT charge, or else result in the beneficiary taking on a held-over gain, they rarely make sense from a tax perspective.
If the government’s proposals go ahead and APR and BPR are no longer available in full, that will shift the equation. Thought should be given to whether the possible IHT saving of a lifetime gift will justify the CGT consequences.
However, there are other factors to take into account, including whether you can afford to gift assets, bearing in mind that retaining any use of gifted property, or the income it generates, can result in a reservation of benefit and so prevent any IHT savings. If you’re passing on your business or a rental asset, you need to consider whether you have other sources of income to fund your retirement.
Use of Trusts
While trusts may not in reality be the easy IHT saving trick they are often portrayed as, they still have an important role in IHT planning.
For one thing, trusts can help boost how much can be passed on tax free. As well as their own nil rate band, trusts will now also have their own £1 million allowance for 100% APR/BPR (albeit one that will be shared with other trusts created by the same settlor(s) since 30 October 2024). This means that, if set up correctly, a trust will be able to hold up to £1,650,000 without incurring an IHT liability.
Aside from this, trust IHT is still easier to plan for than IHT on death. Under the new rules, the charge will arise on a known date every 10 years at a rate of up to 6% (and in effect up to 3% for APR/BPR property, under the new rules), rather than at a rate of up to 40% whenever the owner dies. Trustees can plan the trust’s and the underlying business’ finances to ensure that the funds necessary to pay the tax will be available at the appropriate date. Importantly, in most cases, the gain on assets settled onto trust should also benefit from hold-over relief. This will have the effect of deferring the realisation of the gain and, ultimately, aiding with the liquidity position for the business.
Conditional Exemption for Heritage Property
A Conditional Exemption (CE) from IHT is provided for certain assets, including:
- Buildings of outstanding historical or architectural interest;
- Land of outstanding scenic, historic or scientific interest; and
- Objects or collections of pre-eminent national, scientific, historic or artistic interest
Where assets are assessed to qualify for CE, the exemption will only be granted on the basis of an undertaking given by the beneficiary to HMRC to preserve the asset and to make it available for public access. When CE has been granted, it is also possible to claim CE on a trust fund set aside for the maintenance of the property.
Where it has been possible to obtain 100% APR or BPR on an estate, there has been no need to consider conditional exemption. However, with larger estates no longer able to qualify for 100% relief, CE will likely become more attractive in many cases.
Helping you find the right solution
If the government’s proposed changes go ahead in their current form, planning is going to become even more complex. Expert advice has never been more necessary. After all, when it comes to tax and succession, a failure to plan is a plan to fail.
Quastels’ Private Wealth and Tax team is able to provide specialist advice on these topics and more. The team has been joined this year by Jack Burroughs TEP, Senior Associate, who was previously the Private Client and Tax Adviser at the CLA (the Country Land and Business Association) where he assisted some of the country’s largest estates with their tax and succession planning. The team are able to provide land and business owners with expert advice, tailored to their particular circumstances and the commercial realities of their business.
To discuss your requirements and find out how we can help you, please get in touch.
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Cryptoassets and UK Tax- FAQs
UK tax returns are due by the end of January – but do you know whether you need to report your cryptoassets?
31 January is a key date in the UK tax year, as the deadline for submitting a self-assessment tax return. Hopefully by the time you read this you will be secure in the knowledge that your own return has been submitted, if you are a self-assessment taxpayer. However, if you have been investing in cryptoassets, are you sure that you have reported everything you need to? Unfortunately, given this is such a new type of asset and the law is still being established, many people are unaware of the tax rules relating to their cryptoasset holdings.
For example, have you ever found yourself thinking along the following lines:
- I’ve invested into crypto, and I switch between different tokens from time to time, but until I cash in for fiat currency I don’t have any tax issues to worry about.
- I can’t have a UK tax liability on my crypto, because I’m within the FIG regime, and only deal with offshore exchanges.
- I don’t need to declare tax on my crypto, because HMRC have never asked me to submit a tax return.
If so, you need to carefully consider your tax position – read on for more details.
Capital Gains Tax – Do I have to pay CGT on cryptoassets?
In the UK, capital gains tax (CGT) is payable on the disposal of any asset. In a straightforward case, this would be when you sell something for cash. For example, if you purchased a Bitcoin in 2010 for £10,000, and you’re selling it now for £80,000, then you would have made a capital gain of £70,000, less any deductible costs.
Do I have to pay tax if I swap one crypto token for another?
However, the concept of a disposal goes far beyond a cash sale. For one thing, it includes an exchange of one asset for another, even where one cryptoasset token is swapped for another. Therefore, if instead of selling your Bitcoin for cash you had exchanged it for 30 ETH, you have still made a disposal, and so could be liable for CGT on the difference between the price you paid for the Bitcoin, and the market value of the ETH received in exchange.
Do I have to pay tax if I gift or spend a crypto token?
More broadly, you will be making a disposal whenever you give up your ownership of a token. For example, if you make a gift to somebody, or spend it, such as to purchase an NFT or to pay for other goods or services. Each of these scenarios can be subject to CGT.
Do I have to pay tax on mining or staking?
If you are receiving tokens through mining on a proof of work blockchain, or staking on a proof of stake blockchain, then you need to consider whether this is subject to income tax.
The law on this issue is currently not certain, but HMRC’s view is that generally income from mining or staking will be subject to income tax, after deduction of certain allowable expenses. We can provide advice on this topic.
Remittance basis/FIG regime taxpayers – are crypto gains and income subject to UK tax?
If you were a remittance basis taxpayer in past years, you do not have to pay UK tax on relevant foreign income, or foreign chargeable gains, from that period if such income or gains are not remitted (or brought back) to the UK. If you qualify for the new Foreign Income and Gains (FIG) regime, you do not have to pay UK tax on relevant foreign income, or foreign chargeable gains, while within the FIG regime. However, can a decentralised cryptoasset recorded on a global blockchain be said to be ‘foreign’?
Again, the law has not yet fully clarified this point. However, you need to be aware that HMRC has taken a very wide interpretation of the law, based on the residence of the beneficial owner. HMRC’s position means that remittance basis/FIG regime taxpayers are unlikely to escape UK tax on their cryptoasset income and gains, even where tokens are held for them by a foreign exchange or via a wallet held outside the UK.
If you find yourself in this position, you need to take legal/tax advice, as the position is likely to turn on the precise factual arrangements, as well as the interpretation of the law.
What to do about your cryptoasset taxes
If you find yourself having made cryptoasset disposals, then you need to consider your potential CGT or income tax liability and whether this needs to be reported to HMRC. CGT and income tax are both self-assessment taxes, which means that it is your responsibility to ensure you have reported anything you need to report, whether or not HMRC have already asked you to submit a tax return.
The calculations are not straightforward. For one thing, there will be various deductible costs, to reduce your tax liability. For another, fungible cryptoasset tokens are subject to the share pooling rules, meaning that it is necessary to work out an average cost based on all of your purchases.
Specialist software is available, which can help with these calculations. However, you need to understand the legal interpretation of transactions in order to ensure that the software is analysing your tax liability correctly.
If the result is that you have made a net loss for the year, then you may not need to submit a tax return, but it can still be worth reporting your losses to HMRC to enable them to be deducted against gains you make in the future.
How Quastels can help with cryptoasset taxes
Ben Rosen, Partner, and Jack Burroughs, Senior Associate, in the Private Wealth and Tax team are leading experts on the legal and tax treatment of cryptoassets. We can therefore advise you on the issues that might arise in calculating your taxes, including:
- which transactions are disposals for CGT;
- how staking and mining income is calculated; and
- whether gains and income are located in the UK or abroad.
We can provide the analysis of your cryptoasset gains and income needed to submit your tax return, and state your legal position to HMRC where the law is unclear or where mistakes may have been made. We are also able to assist with your estate planning for cryptoassets, helping to ensure that your tokens can pass to those you want to receive them, as tax-efficiently as possible.
To discuss your circumstances and find out how we can help you, please get in touch.
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