Example 2D
No transfer of beneficial ownership upon adding collateral, a capital reward and liquidation

See our other other examples to see the different tax positions of this same scenario:
  • Example 2A - income reward - transfer of beneficial ownership
  • Example 2B - income reward - NO transfer of beneficial ownership
  • Example 2C - capital reward - transfer of beneficial ownership
  • Bought 10 BTC for £100,000 in October 2020
  • Provided collateral of 10 BTC in March 2022 for indefinite period, when worth £30,000 per BTC
  • Borrowed 105,000 USDC in March 2022, when tokens worth £75,000
  • Reward of 5% pa receivable in BTC when the collateral is withdrawn
  • 10.5 BTC is received when collateral is withdrawn in March 2023 (10 collateral and 0.5 capital reward), when worth £20,000 per BTC and 105,000 USDC loan repaid at same date when worth £77,000..
  • Lending charges of 5,500 USDC paid upon repayment of loan (5% pa) – worth £3,850 (5,500 UDSC purchased on same day).
  • No other acquisitions or disposals of BTC (assume matching rules not relevant for simplicity)
  • Assumed that beneficial ownership is NOT transferred upon entry
  • The CGT (capital gains tax) free annual exemption is already used and the CGT rate is 20%, as income is more than £50,270
  • Redemption tokens are received upon providing the collateral
  • Sold 10.5 BTC for £525,000 fiat sterling in March 2024

There is no CGT disposal of the collateral upon locking it away.
For tax purposes any acquisition of redemption/claim tokens or a ‘right to receive a future quantity of tokens’ is ignored for CGT purposes.

It is necessary to estimate the present sterling value of the BTC capital reward. Although it is a set return of 5% pa; because the term of providing collateral is open-ended, the number of BTC to be received in the future as the reward is not known and is not ascertainable.
The taxpayer intends to only lock away the collateral for 6 months, so they decide to estimate the reward to be 0.25 BTC. The current sterling value of 0.25 BTC is £7,500.
Although there is no HMRC guidance on this point, it is likely this should to be treated as a part-disposal of the 10 BTC added as collateral. Therefore in the capital gains tax calculation for the capital reward, the proceeds in the capital gains tax calculation will be £7,500 and a proportion of the acquisition cost of the 10 BTC will be deducted based on the standard part-disposal formula:
A / (A + B)
A = the disposal proceeds of £7,500
B = the market value of the 10 BTC retained of £300,000.
Therefore 2.4% of the £100,000 acquisition cost can be deducted from the £7,500 disposal proceeds. In this example, the capital gain would be £5,061 (£7,500 less £2,439).
Capital gain of £5,061 realised in the 21/22 tax year, upon adding 10 BTC collateral in return for a capital reward.
£1,012 CGT (£5,061 at 20%) is payable by 31 January 2023.
The £7,500 estimate of the capital reward has been subject to tax at which point there is no idea when the reward will be received (since the collateral term is indefinite and the reward can only be received upon exit).
The acquisition cost of the 10 BTC in the S104 pool has been reduced by £2,439 to £97,561.

Upon adding the collateral, a ‘Marren v Ingles right' to receive an unascertainable future quantity of capital reward tokens’ is received. This is a right to receive the estimated 0.25 BTC capital reward (however we do not know it is 0.25 until the collateral is withdrawn).
The acquisition cost of this ‘Marren v Ingles right' is £7,500. When the collateral is withdrawn, this right will be disposed of in exchange for the receipt of the capital reward tokens (which we know with the benefit of hindsight will be 0.5 BTC).

The receipt of the loan could be in fiat (ie GBP/USD/EUR) or cryptoasset tokens. In this example 105,000 USDC tokens are received, which are worth £75,000 at the date of receipt.
The CGT acquisition cost of the 105,000 USDC tokens received as a loan is £75,000.

The disposal of redemption/claim tokens or a ‘right to receive a future quantity of tokens’ is ignored for CGT purposes.

The collateral was locked away for a year, rather than the estimated 6 months, therefore 0.5 BTC was received as a capital reward upon exit, rather than the 0.25 BTC which was estimated and subjected to CGT upon adding the collateral upon entry. The market value of the 0.5 BTC received in March 2023 is £10,000.
There is a further capital gain of £2,500 upon receipt of the capital reward (disposal proceeds of £10,000 less the acquisition cost of £7,500), with CGT of £500 payable by 31 January 2024.
£5,061 of the reward is taxed at 20% in 21/22 when the BTC was added as collateral and the balance of £2,500 is taxed at 20% in 22/23 when the reward was received (at the time the collateral was withdrawn).

The 0.5 BTC received as a capital reward has an acquisition cost of £10,000. Accordingly, 0.5 BTC with acquisition cost of £10,000 is added to the S104 pool for BTC.

When the loan of 105,000 USDC is repaid, this is treated as a disposal of the USDC for CGT purposes. The disposal proceeds are £77,000 (the market value at the date of repayment and the acquisition cost is £75,000 (assuming for simplicity that the acquisition cost upon entry is matched to this disposal). Therefore, there is a capital gain of £2,000 on the increase in value throughout the term of the loan.
There is no tax relief for the £3,850 worth of lending fees paid upon repayment (5,500 USDC). However, using 5,500 USDC to pay the lending charges, is a CGT disposal of the 5,500 USDC. The disposal proceeds are £3,850, but the acquisition cost is also £3,850 as the USDC was purchased on the date of the loan repayment. Therefore there is no capital gain or loss on the payment of charges.

Capital gain of £417,439 (£525,000 less original acquisition cost of £107,561) in the 23/24 tax year. The acquisition cost of the 10.5 BTC in the S104 pool was £107,561 (£100,000 less £2,439 plus £10,000).
CGT of £83,488 (£417,439 at 20%) to pay for 23/24, due for payment to HMRC by 31 January 2025.
In total £85,000 CGT is paid on the 10.5 BTC on a total capital gain of £425,000. However, cashflow is improved significantly because there is no transfer of beneficial ownership, as only the estimated capital reward suffered CGT upon adding the collateral and receiving the reward.

If the collateral had been liquidated in March 2023, rather than being withdrawn, the 105,000 USDC loan is retained (so there is no disposal of the 105,000 USDC for CGT purposes upon liquidation).

As the 10 BTC which has been liquidated was not already disposed of for CGT purposes upon adding the collateral, there is now a CGT disposal of the 10 BTC upon liquidation.
According to the HMRC guidance at CRYPTO61640 and the HMRC example at CRYPTO61675, the disposal proceeds of the 10 BTC should be recorded as £200,000 (the market value at the date of liquidation). The acquisition cost is the original £100,000 paid for the 10 BTC.
Following the HMRC guidance, there is a capital gain of £100,000 in 22/23 upon liquidation, with CGT of £20,000 payable by 31 January 2024.
You are treated as selling the 10 BTC for £200,000, even though all you received nothing in return for giving up the collateral upon liquidation. The 105,000 USDC loan has been retained upon liquidation, but this should not be viewed as consideration for the collateral given up; because the loan is treated as acquired for and sold at market value for tax purposes, with the effect that you are only subject to CGT on the appreciation or depreciation in value for the period that the loan is in your possession.
In Example 2A and Example 2C, where this is a transfer of beneficial ownership upon adding the collateral, there is an overall loss on liquidation of £100,000. This seems fair and logical, because the collateral which cost £100,000 has been given up for nothing in return.
When following the HMRC guidance, the gain of £100,000 in this example and in Example 2B, where there is no transfer of beneficial ownership upon adding the collateral, is £200,000 more than in Example 2A and Example 2C. However nothing was received in exchange for the collateral in either example, and the £100,000 spent on the original purchase of the collateral is now lost in both cases. So it would seem logical that the overall tax position should be the same, regardless of whether or not beneficial ownership is transferred when the collateral is added.
If the HMRC guidance is not followed and alternatively the disposal proceeds upon liquidation in this situation are recorded as Nil (not market value as per the HMRC guidance), it realises a capital loss of £100,000, which is a true reflection of the loss by the taxpayer and seems to more fairly reflect the position.
It is recommended you seek professional tax advice regarding this matter, especially if you are considering taking a position that is not in agreement with HMRC's guidance.

Let's say for example that upon liquidation no capital reward tokens are received and will never be received.
There is a disposal of the 'Marren v Ingles right' for Nil disposal proceeds, which realises a capital loss of £7,500 in 22/23.

  • Adding collateral - no capital gains tax event
  • Estimated capital reward - capital gain of £5,061 in 21/22 - £1,012 CGT payable 31/1/2023
  • Liquidation - principal tokens:
    • Following HMRC guidance: Capital gain of £100,000 in 22/23 - £20,000 CGT payable by 31 January 2024. The gain arises as the market value at liquidation was £200,000 and this is notionally treated as the disposal proceeds and the original cost of £100,000 is deducted to arrive at a gain of £100,000
    • Possible alternative approach:
      Capital loss of £100,000 in 22/23 - £20,000 CGT reduction in 22/23 or future years (providing there are capital gains to offset). The £100,000 net capital loss is the cost of the original 10 BTC which was liquidated
  • Liquidation - capital reward – capital loss of £7,500 on capital reward in 22/23 - £1,500 CGT reduction in 22/23 or future years (providing there are capital gains to offset
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On this page
Collateralised Loan with NO beneficial ownership transfer
At point of entry
No CGT disposal - collateral added
CGT disposal - estimated capital reward
CGT acquisition - 'Marren v Ingles right' to capital reward
CGT acquisition - receipt of loan
At point of exit
No CGT disposal - collateral removed
CGT disposal – ‘Marren v Ingles right' to capital reward
CGT acquisition – capital reward
CGT disposal - repayment of loan
On sale of BTC for fiat
What if there was a liquidation of collateral instead?
No CGT disposal - USDC loan
CGT disposal - collateral locked away
CGT disposal – ‘Marren v Ingles right' to capital reward
Summary of tax position with liquidation