This article was updated on 11 October 2023.
Digital (or crypto) assets now form part of many people’s financial portfolios. They are commonplace and many are routinely investing in digital assets to diversify their investments. Recent reports have indicated that 1 in 10 people in the UK have some form of crypto asset. The future of how people hold digital assets, and how people interact around their digital assets, is ever changing. Digital assets are increasingly subject to financial disputes between couples when they divorce and it requires a good understanding of how they work to unravel issues relating to quantum, value and accessibility.
Whether an individual’s digital assets are substantial or modest it is important that family lawyers are able to advise divorcing couples as to how digital assets will be treated by the courts upon divorce. Understanding and awareness of the law surrounding digital assets is essential to enable us to best protect our client’s interests.
The Law Commission recognises that the increasing use of digital assets for an expanding variety of purposes means that the laws that govern or potentially govern their use and disposal need to be reviewed.
As it stands, the law divides assets in to two main categories:
In June 2023 the Law Commission published their long-awaited report on the treatment of digital assets in England and Wales, which recommended legislative reform, continued development of the common law, and further guidance from a panel of industry experts.
The report makes few specific recommendations for law reform. The common law of England and Wales continues to develop in the courts, and the report acknowledges its importance in developing a comprehensive regime for the current and future digital asset landscape (which is ever changing), as it has the flexibility required to do so. The two key statutory law reform recommendations are:
Until we have changes in the law and the definition of digital assets, the family courts have to apply the existing law to this new category. As family lawyers we have noticed a number of the same questions arising again from clients, both those with digital assets, and those who suspect that their spouse has them. These include:
Do digital assets need to be disclosed as part of divorce proceedings?
Yes. Both parties have an obligation to provide full and frank disclosure of all assets in which they have a legal or beneficial interest in.
How are digital assets valued as part of divorce proceedings?
As part of the financial disclosure process, individuals must provide a full account of any digital assets they hold, whether this is crypto currency, NFTs, or other tokens or assets. This needs to include details of the size of the holding, the current value, and any applicable tax or charges, together with documentary evidence of what is held and the assets’ current value.
What about the market volatility?
The digital asset market is in the news daily on account of its substantial fluctuations. We are constantly reminded of the big winners and big losers in the market. As family lawyers, we are used to dealing with changes in the value of assets as part of the ongoing negotiations upon divorce. For example, individuals with shareholdings, business assets, and property assets often experience fluctuations in value throughout the negotiations or court proceedings.
It is usual for updated valuations to be sought at regular intervals as part of the ongoing negotiations, or the court process where parties are required to provide updating disclosure before a hearing. This ensures that the parties, their lawyers, and the judge are working with the most accurate and up to date figures when making decisions. In the same way, digital assets will need to be updated throughout the process.
If you are concerned about the level of fluctuations and risk you are taking on by retaining or receiving digital assets as part of the overall settlement of the case then this is definitely something to discuss and receive advice on. It is important that any risk element of the assets following a divorce or separation is considered when dividing the assets. For example, you may be taking on a significant economic risk if you were to retain mostly digital assets, and your spouse is retaining traditional cooper bottomed assets. This risk should be carefully considered with the implications of market volatility explored during the negotiations to ensure a fair outcome is achieved.
One of Penningtons Manches Coopers digital asset specialists, Charlotte Hill, has acted in proceedings involving the protection of cryptocurrency. She comments: “While the UK government will now decide which of the commission’s recommendations to adopt, as the commission notes, the common law continues to adapt apace to ensure that those dealing in this nascent industry receive protection and assistance where required.”
Are digital assets taxed?
It is paramount that the parties and the court understand not only the current market value of assets but also their net value. This is an important part of the negotiation process: whether the assets are to be retained, transferred between the parties, or sold. Digital assets are no different.
In summary, the following rules currently apply to digital assets:
The appropriate type and level of taxation applicable needs to be carefully considered as part of the divorce disclosure process. The last Autumn Budget, which took effect on 6 April 2023, introduced additional relief from CGT for couples who are transferring assets as part of a financial settlement. However, it remains essential that any tax triggers are understood and taken into account when calculating the net effect of a financial settlement.
How can I cross check the disclosure of digital assets?
Many people have concerns about disclosure of digital assets. It is important that if you or your spouse have digital assets you find a family lawyer who has some understanding and experience in this area and knows what questions to ask and disclosure to look for..
The confusion and complexity that continues to surround digital assets in family law is raised further by the lack of clear guidance; it is hoped that with time, and the development of the law in the courts, the progression of the Law Commission’s recommendations, and as the common law continues to develop, we will have further clarity in the future.
If you are separating from your partner and either of you hold digital assets then you should seek legal advice as soon as possible. Our team is experienced with the nuances of digital assets and the approach of the family courts. Colleagues from our private client, tax, corporate and litigation teams can also assist.
Similarly, if you are at the outset of your relationship and want to know where you stand in terms of protecting your assets, including digital assets, then please do not hesitate to get in touch to see how we can help. You should seek advice and consider whether a pre-nuptial or post-nuptial agreement is appropriate to protect your digital assets now and in the future (particularly if you are expecting a windfall).
Should you have any questions regarding yours or your partner’s digital assets now or in the future then you can contact either Rachel Donald or Eleanor Moodey to explore your options.