HMRC cryptoassets manual – where does cryptocurrency reside?

8th October 2021


HMRC’s recent publication of their Cryptoassets Manual gives us an insight into their view on the location (residence) of cryptocurrency assets – they take the view that cryptocurrency is located in the place where the person who benefits from owning it is resident.

A cryptocurrency holder’s residency will be assessed using the statutory residence test. Where a cryptocurrency is resident is important for both UK domiciled and non-UK domiciled individuals.

The importance centres around the reporting of income and capital gains and the application of inheritance tax in the UK. This is due to the fact that non-domiciled individuals in the UK are only subject to inheritance tax on the value of their assets situated in the UK; if the cryptocurrency is treated as non-resident in the UK, then it may not be subject to inheritance tax in the UK at the lifetime rate of 20% or death rate of 40%.

The residency of cryptocurrency also needs to be considered as part of the drafting of a will. Wills can be made limiting the scope of their terms to cover assets situated in certain jurisdictions. For instance, you could make a will in England and Wales dealing with the distribution of your assets resident there, as well as a separate will dealing with the distribution of your assets situated in the USA. The question of residency is then important to determine which will is binding on which assets.

HMRC’s view assesses residency for this purpose, not based on any legal principle, but on a pragmatic conclusion that uses the residency of the ‘beneficial owner’ of the cryptocurrency to determine the residence of the asset. Their view is that this gives a clear, logical, predictable and objective rule which can easily be applied.

Case law in the UK courts has determined that cryptocurrency is specifically designed not to have a ‘location’. It is therefore necessary for the courts to develop the law when it comes to allocating an artificial location to cryptocurrency, which is, in essence, a form of intangible property.

A contrasting view to that set out in HMRC’s manual is that the rules governing other types of intangible property should be applied to determine the residency of cryptocurrencies. In short, the courts’ view so far is that cryptocurrencies should be allocated (for residence purposes) to the location where they can be ‘dealt with’.

Cryptocurrency is dealt with using a private key. Using the above principle, the location of cryptocurrency would be where the ‘participant’ in the cryptocurrency system is domiciled, rather than where the beneficial owner is domiciled. This is because the participant has control of the public address to which the cryptocurrency has been allocated and holds the private key which is needed to authorise transactions in relation to it.

The beneficial owner of the cryptocurrency may also be the person with control and so their residency may be the same. However, there may be situations where it is not held by the beneficial owner but is held on cryptocurrency exchanges, trading platforms or by trustees.
There is currently no legal precedent laid down by the UK courts on this point but, given the increasing appetite for cryptocurrency, it is an important consideration for the future.

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