Written by Yousafa Hazara, Associate Solicitor, Jess Fazzone, Associate Solicitor, and Shannon Tong, Trainee Solicitor - Tax, Trust and Estates.

Digital assets are now undeniably a core part of people's lives. The increasing prevalence of social media, cryptocurrencies and non-fungible tokens (NFTs) mean that most people won't acquire such assets during their lifetime but also leave them behind when they die. Amongst practitioners, there's no consistent approach on how best to deal with such assets and, for this reason, it's more important than ever to plan ahead so that digital assets with sentimental and monetary value are not lost.

What is a digital asset?

There's currently no legal definition of “digital asset”. Digital assets are objects that exist only in electronic format and have monetary or, sentimental value such as photographs, social media accounts, loyalty schemes and cryptocurrencies. A cryptocurrency (or “crypto”) is a digital currency, the most well-known crypto is Bitcoin.

According to information obtained by Finder, the number of people who have bought cryptocurrency in the UK has increased by 558% since 2018 when just 3% of the population owned cryptocurrency. Despite the increasing prevalence of crypto and other digital assets, much needed regulation in this area is still awaited, which has left a number of unanswered questions when it comes to owning digital assets:

What are some of the key challenges with digital assets? 

Tax: capital gains tax may need to be paid if you sell your digital assets, exchange digital ‘tokens’ for a different type of digital asset, use cryptocurrency to pay for goods or services, or gift digital assets to another individual. Inheritance tax (IHT) may also be levied if your estate contains digital assets, although where such assets are ‘located’ for UK tax purposes (including IHT) remains the subject of academic scrutiny (see: the most recent guidance note from STEP in this area). Unexpected tax liabilities can arise where individuals hold digital assets of significant value and unwittingly believe that the exchange of digital assets does not fall within the UK tax net. Individuals should seek appropriate tax planning and structuring advice, as required.

Tax compliance: individuals can face severe penalties for failing to report capital gains correctly and on time. HMRC have the power to make inquiries in this regard. A popular digital currency platform, Coinbase, previously received notice from HMRC to provide disclosure in relation to their customer base. Specialist advisors can assist with the completing tax returns and ensuring any historic tax liabilities have been addressed.

Estate planning: leaving digital assets within your estate when you pass away could cause practical difficulties for the executor or administrator. The duty of an executor or administrator is to identify and distribute the assets within the estate. However, it can be difficult to identify and locate digital assets, especially since such assets can be owned anonymously. More and more people are going paperless which means that we no longer keep paper records of our assets and therefore, when we die, it may be impossible to discover and collect all intangible assets. A majority of assets are accessed through online portals or apps that are protected by stringent security measures. This poses a challenge for estate planners as many digital assets involve usernames and confidential passwords, the details of which are unsuitable to include in a conventional Will.

When it comes to personal information stored through a cloud provider, the same issues arise. A recent survey by STEP (Digital Assets: a call to action) found that over 40% of providers contain restrictive standard contracts and terms of service and 85% of standard contracts for consumer cloud services did not explicitly address what happens to customer accounts or data stored in the cloud when the customer passes away.

It is recommended that individuals holding digital assets seek the assistance of a solicitor in preparing a Will and a Letter of Wishes. A Letter of Wishes can be particularly helpful as it can be updated regularly with details of the assets owned, stored confidentially and serve as a guide for the executor or administrator of a deceased’s estate.

What practical steps can you take in order to prepare and protect your digital assets?

The Law Commission of England and Wales is currently reviewing the law on digital assets and a consultation is expected at some point next year. In the meantime, The Law Society is urging all people to make sure that they include digital assets in their Wills to ensure that access can be gained to any online accounts following death.

You could also make use of other planning tools, such as:

  • A memorandum of digital assets with emails, usernames and passwords (so long as the list is kept safe). If you have cryptocurrencies, we can suggest different ways that you can safeguard your private key and wallet access codes
  • Review and update the memorandum whenever usernames or passwords are changed and when new digital assets are generated
  • Make hard copies, burn to CD or USB, or download onto a separate external hard drive any data currently stored solely online
  • Consider any terms and conditions that you agree to when creating online accounts and nominate someone where possible to deal with your accounts post death
  • Regularly update your digital assets memorandum, and update any instructions or guidance communicated in your letter of wishes about your digital assets.