The Autumn Budget 2024 introduces several changes that may have implications for the digital asset sector, impacting how individuals and businesses engaged in crypto activities will navigate tax and regulatory requirements. Here are the main areas likely to affect the digital asset world:
1. Capital Gains Tax (CGT) Adjustments
- The increase in CGT rates on some assets is especially relevant for those holding or trading digital assets. Gains from crypto transactions are subject to CGT in the UK, so the planned increases will mean higher tax liabilities for digital asset investors:
- For business owners and entrepreneurs, the Business Asset Disposal Relief (BADR) rate increases from 10% to 14% in April 2025, then to 18% in April 2026.
- This could lead crypto investors, particularly high-net-worth individuals and crypto business founders, to reassess their strategies for withdrawing or reinvesting gains.
- For individuals, higher CGT rates make tax-efficient planning and timing of crypto asset disposals even more important.
2. Increased National Insurance and Employment Taxes
- Digital asset businesses, especially startups and firms heavily invested in research and development (R&D), will need to account for higher employment costs:
- Employers’ NICs are set to increase from 13.8% to 15%, impacting any crypto firm with employees in the UK.
- This might influence decisions on employee compensation, headcount, and the use of contractors, especially as crypto businesses often require highly skilled staff, including developers, analysts, and compliance experts.
- The national minimum wage hike could affect operational budgets for businesses within the crypto space, particularly those with larger workforces or those relying on junior roles.
3. VAT on Private School Fees and Implications for Crypto Wealth
- With VAT applying to private school fees from January 2025, crypto investors with children in private education will face higher expenses. For high-net-worth individuals in the digital asset sector, this expense may increase their overall tax burden and reduce disposable income, prompting some to reconsider the tax advantages of crypto gains compared to traditional income.
4. Inheritance Tax (IHT) on Undrawn Pension Funds and Digital Assets
- New IHT provisions for undrawn pension funds from April 2027 extend estate taxes, which could affect crypto holders who have not yet liquidated substantial parts of their holdings. Crypto assets, often viewed as part of long-term wealth, may need to be included in estate planning, especially if held in personal wallets or in foreign custodial accounts.
- Crypto investors with substantial wealth may also be affected by reduced agricultural and business property reliefs, limiting IHT relief to the first £1 million. Investors may need to adopt new strategies for wealth preservation, considering that digital assets might not qualify under business property relief depending on HMRC’s classification.
- As yet, there are still no specific products available to crypto holders to allow for a more tax efficient wrapper unlike in the TradFi space.
5. Tighter Compliance and Reporting Standards
- While not exclusive to digital assets, the Chancellor’s budget places a strong emphasis on digital transformation in tax reporting, with initiatives such as Making Tax Digital for income and electronic invoicing:
- Crypto businesses should prepare for increased scrutiny and may need to integrate digital record-keeping and reporting solutions. This will be especially pertinent when crypto transactions are included in HMRC’s “Making Tax Digital” framework, requiring firms to report profits and income from crypto holdings more frequently.
- Investors and traders may also face greater compliance requirements with HMRC as digital assets come under tighter tax scrutiny.
6. Unchanged Corporation Tax Rates
- The stability in corporation tax rates at 25% for the main rate is relatively favourable for the digital asset industry, which often comprises smaller businesses with tight margins.
- Companies engaged in R&D can continue to benefit from the unchanged R&D tax relief, providing support for crypto firms involved in developing blockchain technology, cybersecurity, and DeFi solutions.
Strategic Considerations for the Digital Asset World
The 2024 Autumn Budget suggests a trend toward increased tax rates and tighter compliance. Crypto investors and businesses should consider the following actions:
- Advance Tax Planning: As CGT rates increase, strategically timing crypto disposals will be critical. Engaging with tax professionals to optimise the timing and amount of crypto gains can help reduce liabilities.
- Enhanced Record-Keeping: Businesses and individuals should adopt meticulous tracking of crypto transactions, especially as digital reporting becomes more standardised.
- Explore Structuring Alternatives: Depending on HMRC’s classification of crypto gains, alternative structures may help high-net-worth investors manage inheritance and income tax burdens effectively.
With these changes, the digital asset world in the UK faces a complex tax landscape. By aligning with a knowledgeable tax team, such as Nephos Group, crypto investors and businesses can ensure compliance while strategically navigating these evolving regulations. For tailored advice on how these policies affect your digital asset holdings, reach out to us.
