The Tax Consequences Of Inheriting Property

Do you have the difficult task of dividing up your assets and determining who should get what?

It’s essential to look at the tax consequences of how your property will flow through to your beneficiaries.

When assets pass from a deceased individual to a beneficiary of the estate, the tax impact will generally depend on:

The nature of the asset.
The tax characteristics of the beneficiary, such as their residency status.

Inheriting Cash

When a deceased individual passes cash to their estate and the estate passes it to a beneficiary, you generally won’t face any direct tax issues, assuming the cash is in AUD.

Inheriting Assets

Death is a taxing event. When the asset has a change of ownership, generally, a Capital Gains Tax (CGT) event is triggered. However, the tax rules provide some relief from CGT when someone dies. The basic rule states you disregard a capital gain or loss triggered by a death unless you transfer the asset to one of the following:

An exempt entity (although there are some exceptions to this where the entity is a charity);
The trustee of a complying superannuation fund; or
A foreign entity and the asset is not classified as taxable Australian property.

The exemption applies if the deceased’s legal personal representative (executor) or a beneficiary of the estate receives the asset.

Once the asset has been transferred to the beneficiary and they sell it, the tax impact needs to be managed.

Let’s assume you inherit an ASX listed share portfolio under your mother’s Will. The tax outcome will depend on whether your mother was an Australian resident for tax purposes when she died. It will also consider whether the shares were acquired by your mother before or after 20 September 1985.

If your mother was an Australian tax resident when she died and acquired the shares after CGT applied, the cost base of the shares normally reflects the original purchase price. That is, the tax rules treat the inherited shares as if you purchased them.

If your mother lived in Australia when she died and acquired the shares before CGT applied, the market value of the shares at the date of death normally resets their cost base.

If your mother was a non-resident when she died, then the cost base of the shares is normally based on their market value at the date of death.

But it’s not all about the tax. Managing shares in your Will can be difficult as prices and allocations change over time. A portfolio that was once worth a small amount 20 years ago, might be worth significantly more when you die.

Property

Let’s assume you inherit an Australian residential property from your father under his Will. For certain tax purposes, you are taken to have acquired the property at the date of his death.

The general rule is that the executor and/or beneficiaries of the estate inherit the cost base and reduced cost base of the CGT assets (the house) owned by the deceased just before their death. But this isn’t always the case. Especially when it comes to pre-CGT properties and a property that was the main residence of the deceased individual just before they died.

Special rules exist that enable some beneficiaries to access a full or partial main residence exemption on the inherited property. If your father used the house as his main residence before he died, did not rent it out or use it as a business, and was an Australian tax resident, the executor or beneficiary might qualify for a full CGT exemption if either (or both) of the following conditions are met:

The beneficiary disposes of the house within two years of the date of death; or
One or more of the following people lived in the dwelling as their main residence from the date of death until they dispose it:
- The spouse of the deceased (unless they were separated);An individual who had a right to occupy the dwelling under the deceased’s will; or
- The beneficiary who is disposing of the dwelling.

For example…

The house was your father’s main residence and was eligible for the full main residence exemption when he died. If you sell the house within the 2 year period, no CGT will apply. However, if you sell the house 10 years later, the CGT impact will depend on how the property has been used since.

An extension to the two year period can apply in limited certain circumstances.

If your father didn’t live in the property before he died, you might still qualify for the full exemption. For example, if he lived in a retirement village but kept the property as his main residence for CGT, even while renting it out.

If your father was not an Australian resident for tax purposes when he died, the cost base for CGT purposes will normally be based on the purchase price paid by your father if he acquired it post-CGT.

Foreign Property

If you’re an Australian resident inheriting foreign property from a non-resident who recently died, the cost base usually equals the market value at death. For example, inheriting a UK house means the cost base is its value when your uncle passed away.

If a taxable gain arises on sale, then it is necessary to consider whether the CGT discount can apply. But, you should note that the discount will sometimes be less than 50%. If the gain is taxed overseas, a tax offset can sometimes apply to reduce the amount of tax payable in Australia.

Managing an inheritance and your Will can become quite complex. It is important to always talk to your adviser when these matters arise.

For assistance with estate planning, or to understand the tax implications of an inheritance, please contact us.

This is general advice only and has not been prepared with your individual situation or needs in mind. For personalised advice, we highly recommend that you seek professional guidance from a qualified adviser.