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I'm in the UK. My partner and I aren't married, and we live in separate houses. I'm in the higher tax bracket and he's in the normal bracket. I have a bunch of cryptocurrency, and I'd like to use it to pay off his mortgage. What's the best way to minimise CGT?

  1. Sell the crypto and transfer the resulting UK pounds to his bank account.
  2. Sell the crypto and give him an interest-free loan for the resulting amount that I'm not too fussed about having repaid.
  3. Send him the crypto so he can cash it in, and pay CGT at the lower rate.

I guess I also need to think about minimising inheritance tax, because he's my heir.

I'm not clear on whether I'd need to pay CGT twice with option 1, because it seems like you pay CGT when you realise the asset, but you also pay CGT when you gift somebody money.

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    You don’t need to worry about IHT on gifts unless you die in the next seven years after making the gift.
    – Vicky
    Aug 15, 2021 at 21:38
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    Taxman will treat 2 like 1; you can't change a gift to a loan just by sticking a "This is a loan honest guv" label on it :)
    – AakashM
    Aug 16, 2021 at 7:18
  • Would it be possible to settle the debt with the bank using the crypto directly?
    – Raven
    Aug 16, 2021 at 16:20
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    @AakashM - In the US (yes, I see question is UK, and your profile puts you there as well) - This is exactly how a large gift is converted to a loan. We can gift $15,000 with no tax or even paperwork, but this can multiply to a large one time sum, by having a loan with $15,000 of interest which is then forgiven each year. Aug 19, 2021 at 11:06

3 Answers 3

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Regardless of which route you choose, you will have to pay CGT once, as you are treated as disposing of the asset at market value when you transfer it to him. So even with option 3 you'll be the one paying the CGT. You don't pay any CGT when you gift someone money, so even option 1 only means paying it once.

If you were married or in a civil partnership, then I believe option 3 would allow him to pay CGT at the lower rate because then there are special rules for transferring assets.

As Vicky said in a comment, IHT will only apply if you die within seven years after making the gift. Also it'll only make a difference if the size of your estate exceeds the inheritance tax threshold.

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Frame challenge: do the maths and consider whether paying off the mortgage is really the sensible thing to do.

Interest rates are at a historical low in the UK. You can get homeowner mortgages at around 1 - 1.5% and buy to let at 2 - 2.5%. If your partner's current mortgage rate is worse than that consider remortgaging or asking the existing lender for a new 2 or 5 year fix.

The annual capital gains tax allowance is £12,300. You can sell that amount of assets each year and pay off the mortgage without paying any tax.

Any amount above that will attract capital gains tax of 20% as you are a higher rate tax payer. A gain of £10,000 means tax of £2,000. With a 1.5% mortgage, it would take ~13 years before you had paid that amount in interest, and that is ignoring the time value of money (interest paid tomorrow is better than tax paid today).

I've also ignored the opportunity cost of paying off the mortgage. Personally I would never be looking to pay off loans at 1 - 2% as I can almost certainly do better than that (rental yield alone is an average of 3.5% in the UK).

Sell the crypto and give him an interest-free loan for the resulting amount that I'm not too fussed about having repaid.

Note that this could amount to tax fraud under section 2 of the Fraud Act 2006 as you are misrepresenting that it is a loan when your real intention is that it will never be paid back, with the aim of reducing your tax bill.

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  • One point - cryptocurrency being very volatile may be risky to hold on to for the duration of a mortgage. Does your otherwise good argument hold if selling the cryptocurrency and investing the gain in something else, or does that mean paying the capital gains tax?
    – nsandersen
    Aug 16, 2021 at 22:14
  • @nsandersen The investment strategy is out of scope for the answer. If you were going to swap asset 1 for asset 2 anyway then whatever capital gains tax you will pay to do so can be ignored since it is unavoidable, and you should only consider the opportunity cost of paying off the mortgage. However you should still consider the CGT when deciding if the asset swap makes sense. As an approximation, you should believe that you will earn 20% more from asset 2 than asset 1, assuming similar risk, before you should be willing to pay the CGT.
    – JBentley
    Aug 17, 2021 at 9:31
  • OK. For novices like me the question then becomes whether swapping twice (crypto -> something and then slowly (each year) something -> house) would incur extra CGT?
    – nsandersen
    Aug 17, 2021 at 9:50
  • @nsandersen Yes, you incur CGT any time you "dispose of" an asset. See here. Depending on what you mean by "slowly", you can avoid CGT completely if you stay within the annual CGT allowance.
    – JBentley
    Aug 17, 2021 at 14:24
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Edit: Appears I was totally wrong regarding the transfer and sale as in option 3. As noted but the other commenters, CGT will be due on the market value at the date of gifting and the rate will be based on your income (20% after the 12,300 allowance).

I've left the original answer below anyway.

I'm not sure if there are particular rules regarding the disposal of crytocurrency, I'd highly recommend checking with an accountant/tax lawyer who has a background in crypto before acting.

In terms of tradtional assets however, the tldr is: if you transfer the assets directly, you may benefit from him paying 10% less CGT in the difference between his current earnings and the higher rate band (50,250), however given the complexity (and potential lawyer fees) this may cause with getting the repayment to the lender approved, it may be easier to gift cash.

Before doing any of this, I'd strongly recommend having a chat with an accountant/financial planner rather than just some guy on the internet.

The capital gain

In option 1, you would pay the capital gains, as a higher rate taxpayer, you'd get the first £12,300 tax free, but thereafter pay a rate of 20% on the gain.

In order to finance the loan in option 2, the capital gain will be the same, so there will be no change there. As noted by AakashM in the comments, unless there is a formal agreement prepared detailing a repayment plan, the loan will fail the 'Duck Test' and will be treated as a gift for all intents and purposes.

Under option 3, the gift is transferred tax free, so no capital gain is payable on transfer. The asset is valued at the base value you bought it for however: in this case either your purchase price or 0 if you mined the asset originally.

Your partner would then sell the asset, as he is a basic rate payer, he will pay intitially at 10% (following the same 12,300 allowance). Your capital gains however are added to your total income for the year when calculating your tax band. Since the value of the mortgage is likely to exceed the basic rate tax band, he will pay 20% on the proportion of the gain that exceeds the basic rate band (in addition to income).

https://www.gov.uk/capital-gains-tax/rates

Inheritance Tax

Inheritance tax will only be a consideration if you were to die within 7 years of the transfer. If you were to die in this period, this transfer would be assesible in your total estate, but the rate of tax may be reduced depending on the date of death. More info on these rates can be found here: https://www.gov.uk/inheritance-tax/gifts

Under either option 1 or 3, the value of the transfer would be the 'Market Value' of the goods/cash at the date of transfer. i.e. you would not pay inheritance tax on the purchase price of the crypto at the date of transfer, but the market value on the day. If your partner delays before selling for the cash to repay the mortgage, the assessible amount will still be the value on the day of transfer, which introduces a further risk.

As noted before, if there was no formal arrangement regarding the loan, this would likely be treated as a gift and assessed accordingly. If there was a formal agreement/repayment plan, the cash itself would not be taxable, but the loan agreement would specify to whom the repayment obligation was due in the event of your death. If all assets were to pass to your partner, he would effectively inherit the legal title to receive cash, which would then factor into the estate received, resulting in no net difference in inheritance tax to just giving the cash originally.

Note also that as of 2021 inheritance is tax free up to £500,000 (if a property is included of a value >= £125,000) so if the assets are below this value, no tax is payable. https://www.gov.uk/government/publications/inheritance-tax-nil-rate-band-and-residence-nil-rate-band-thresholds-from-6-april-2021

Lastly, tax is not a good reason for marriage/civil partnership, but inheritance passed between married/civil partners is tax free.

Money Laundering

If your partner is intending to repay his mortgate using gifted cryptocurrency and/or the profits of cryptocurrency, be aware that there will be serious scrutiny applied by the lender to avoid money laundering.

I would recommend ensuring that you have seriously detailed records and evidence prepared regarding: the date & purchase price of the currency, the date & sale price of the currency, any intermediary transfers.

At most lenders, even a cash gift used for repayments requires an attestation letter from the giftor often signed off by a lawyer. I imagine that a gift transfer of cryptocurrency used before the repayment will set off all sorts of alarm bells at any responsible lender.

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    Option 3 is not a tax-free transfer. Gifting to somebody that is not a spouse, civil partner, charity, employee trust, housing association (and a few others) is a disposal for capital gains tax purposes. The market value at time of disposal applies in calculating the gain. [This value will also be the relevant acquisition value for the recipient.] All OP options involve a taxable gain. See gov.uk/hmrc-internal-manuals/capital-gains-manual/cg12920
    – Steve Kidd
    Aug 17, 2021 at 20:47

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