Should I pass on crypto to my family through my will?

I am a US national and have been living in London for nearly 30 years. I hold a substantial amount of money in cryptocurrencies and I am starting to give some thought to how best to hand this on to my family and others I want to include in my will. What’s the best way to bequeath my crypto investments, and does my status as a US and UK taxpayer make a difference?

Lauren Rapeport, associate in the private client and tax team at Withers, a law firm, says congratulations on having successfully navigated the choppy crypto markets. You now have the enviable task of deciding what to do with your gains.

Crypto is, despite what some still believe, taxable in the UK. As a long-term UK resident, you will have to pay UK tax on your crypto returns. Assuming you aren’t a crypto trader or receiving income from mining, staking or in connection with employment, you are liable for capital gains tax (CGT) at up to 20 per cent currently on your gains when you sell or gift your crypto or exchange it for other crypto, after deducting personal allowances and losses.

The value of your crypto is also subject to inheritance tax (IHT) which is currently 40 per cent when that value is passed on to the extent it exceeds your nil-rate band (currently £325,000), subject to exemptions and allowances.

Where crypto is concerned, it is wise to plan early to avoid loss of your keys and your crypto. If you hold the private keys — as opposed to having an account with an exchange, for example — you can transfer crypto on the blockchain directly from your wallet to your beneficiary’s wallet, if they have one, or you could give them your private key.

The type of cryptoasset is also important. For example, some NFTs contain bundles of rights that may not pass automatically. Ideally, you should document the gift and download the wallet data (if applicable) as evidence.

A key consideration is whether to make the gifts now or on your death. If you make a gift now, you may pay CGT on any gains and you’ll need liquidity to pay it, but reduce your IHT bill on death if you survive seven years from the gift.

A gift on death may attract IHT but the base cost is uplifted to market value, wiping out your lifetime gains. In either case, there is no IHT if the portfolio value is below your nil-rate band, or your spouse is the beneficiary.

Alternatively, you could sell your crypto and gift the proceeds, if you think your family and friends might prefer not to hold crypto.

If you leave crypto in your will, you will need to draft it carefully. The will can contain gifts of specific wallets or token holdings or it can establish a longer-term trust of crypto. Selecting an executor or trustee with relevant expertise is essential. Wills are public documents so should not include sensitive information like the private key or its location.

Finally, as a US national, you are also subject to US tax. The IRS taxes certain crypto events in a different way from HM Revenue & Customs, so you should not assume the same principles apply. We regularly advise UK-US clients on the importance of adopting a co-ordinated succession plan.

Are cohabitation agreements worthwhile?

My partner and I plan to move in together and I am pregnant with our first child. We don’t expect to marry, but should we be drawing up any kind of legal agreement to protect our finances? I have heard of cohabitation agreements, but are these worth the paper they’re written on?

Kate Van Rol, barrister at 4PB, a chamber of family law barristers, says cohabitation agreements, so long as they are properly drafted, are legally binding contracts that can be enforced by the courts. There are many reasons a couple may choose to live together but not marry, but it’s important to be aware that choosing not to marry severely limits your financial rights as regards each other.

Cohabitation agreement rules differ slightly across the UK nations, but all will spell out exactly what each partner is entitled to if they split up. An agreement is a document that two parties who are living together (or who plan to live together) can formulate and sign. It affords legal rights and protections that would be assumed automatically with marriage and gives you some financial and legal certainty should one of you become ill, pass away, or you break up. Any parties living together can sign cohabitation agreements — you do not have to be romantically involved.

A cohabitation agreement will give you certain rights including those relating to financial security, property rights, access to pensions and other financial assets, tax benefits and rights relating to children. They can be tailor made to meet your needs.

Take financial security. You will not automatically be entitled to each other’s assets without a marriage, civil partnership or cohabitation agreement. When the relationship breaks up, or on the death of one party, you will not necessarily have any rights to these assets, or your property (depending on the terms of your tenancy agreement or mortgage) unless they are left to you by agreement or in a will. A cohabitation agreement can bestow tax advantages you would otherwise not be entitled to.

Let’s look at rights relating to a child. The father will only have parental responsibility if he is named on the baby’s birth certificate. Parental responsibility gives each parent the right to make important decisions about the child including decisions relating to their education and healthcare.

In terms of next of kin status without an agreement, you will not automatically be informed should your partner be involved in an accident, fall unwell or pass away. You will not receive medical updates, or be able to have a say in medical decisions or if it came to it, funeral plans.

If you do want to create a cohabitation agreement, start by considering your assets and those of your partner, and your suggested division of these assets in the event of death or separation. This could include the property and any savings, investments or pensions.

You can either draft a cohabitation agreement between yourselves or with the assistance of a family lawyer. The cost will depend on the complexity of the agreement.

The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.