If you’ve made large gains through investing in cryptocurrency, you may be planning to transfer your wealth back to fiat currency to fund the purchase of a new family home, investment properties, share portfolios or other ‘tangible assets’. You may also be considering how to structure your new wealth in the most tax efficient way.
In this article, we’ll explore these two overlapping areas and the complications that may arise without expert guidance.
A common property purchase problem
When purchasing properties with crypto gains converted to sterling, it has not been unusual for individuals to find it hard to obtain mortgages: solicitors and lenders have been struggling to complete the enhanced anti-money laundering checks and to show the funds are legitimate. They often ask accountants to provide support through “forensic accounting”: but what does that mean?
In short, the solicitors and lenders want to ensure that:
- The initial funds invested were legitimate
- The profits generated from the investment activity have been reported correctly and are subject to the appropriate taxes
An accountant will therefore need to review the trading statements or wallet activity to identify any taxable events (i.e. gains) which have been made and ensure that these have been appropriately recorded on the tax return of the individual or corporate entity (depending on how the activity was carried out). There will then be an accountant’s letter to the solicitor to outline the work performed and to set out the findings.
Investing excess funds
For many crypto investors, the accumulation of significant wealth has led to them having access to funds which are in excess of what they will require during their lifetimes. We’ve worked with a number of people who are seeking to plan so that their inheritance tax (IHT) liabilities and any taxes associated with the investment of their realised gains are minimised.
While the structures we would suggest to clients are tailored to individual circumstances, we explore three general structures below:
Investing in properties is generally seen as a safe store of wealth which provides a good annual return, so it is not surprising that many cryptocurrency investors are seeking to invest their cryptocurrency gains this way.
These investments can be made personally or through a company. Each approach has its own pros, cons and tax considerations, so we recommend you seek professional advice to suit your personal circumstances.
Family Investment Companies
If you have children and do not need an income from the funds you hold, a Family Investment Company (FIC) structure should be considered.
This structure enables the parents to loan the wealth to a company where its future wealth accumulates. The children are the beneficiaries of this company, therefore removing any future growth in wealth from the parents’ estate for IHT purposes. The parents can draw down on the loan from the FIC to fund their living expenses without incurring any tax on the loan draw down.
You can find out more about FICs in our webinar here.
Further strategic investment in cryptocurrency with the excess funds can also be an option. With rumours that rises of capital gains tax rates for individuals are on the horizon, you may wish to consider using a company to make the investments, where gains will be subject to a lower corporation tax rate: currently at 19% but rising to effective rates of up to 25% from 1 April 2023.
If this option is pursued, we would usually recommend a holding company and subsidiary structure: this is mainly for the commercial reason of reducing the risk of a dividend block arising due to cryptocurrency losses prohibiting the company from declaring dividends. Other income from investments made by other subsidiaries will still be available to be ‘dividended’ to the holding company and onwards to the ultimate shareholders, even if the cryptocurrency investment company has made losses.
A note of caution when using companies to invest
Care must be given in all situations where companies are used, and the income or gains generated by the investment of the funds are required for the individual to live on. If income is taken from a company by an individual by way of dividends, they will be taxed on the income at income tax rates of 7.5/32.5/38.1%. The profits generated by the investments are therefore subject to tax twice: corporation tax and income tax.
How we can help
With so much misinformation about the taxability of cryptocurrencies online, it is safest to seek specialist guidance. BKL’s tax specialists are able to advise clearly and accurately on cryptocurrency tax implications and all the areas covered in this article.
For more information, please get in touch with your usual BKL contact or use our enquiry form.