When thinking about passing on your assets, it’s not just about deciding who gets what – there are tax implications to consider. How your assets are transferred to your beneficiaries can affect how much tax they must pay. This will depend on the asset type and the beneficiary’s tax profile, like their residency status.
Inheriting Cash
If cash is inherited from a deceased estate in Australian dollars, the beneficiary usually has no tax concerns. Cash transfers are generally straightforward without additional tax complications.
Inheriting Other Assets
When it comes to inheriting assets, things get a bit more complex. A change in ownership due to death often triggers a capital gains tax (CGT) event. However, there’s relief in the tax rules that can ease the CGT burden in these cases.
The basic principle is that capital gains or losses triggered by death are ignored unless the asset is passed to:
- An exempt entity (though there are exceptions, such as specific charities),
- The trustee of a complying superannuation fund, or
- A foreign entity where the asset isn’t considered taxable Australian property.
If the asset passes to the legal personal representative or a beneficiary, the CGT is deferred until the beneficiary sells the asset. At that point, the beneficiary will need to consider the tax implications.
Inheriting Shares
Suppose you inherit shares, such as a portfolio, from your mother’s will. In that case, the tax outcome depends on a few factors, including whether your mother was an Australian resident for tax purposes and when she bought the shares (pre- or post-20 September 1985).
- Post-CGT shares: If your mother was an Australian resident and purchased shares after this date, the cost base will be her original purchase price. For instance, if she bought BHP shares for $17.82 in 1997, you will use that price to calculate any capital gain when you sell the shares.
- Pre-CGT shares: If the shares were bought before this date, the cost base resets to the market value at the time of her death. So, if she passed away on 1 October 2024, and the shares were worth $45.96, you would use that as the cost base.
- Non-resident for tax purposes: If your mother were a non-resident, the cost base of the shares would be their market value at the date of her death.
It’s also worth noting that managing shares through a will can be challenging, as share values and investments change over time. What might have been a small portfolio years ago could be worth much more when you inherit it.
Inheriting Property
Let’s say you inherit a house from your father. The tax rules state that the property’s cost base is usually the same as when your father owned it. However, there are specific rules for primary residences and pre-CGT properties.
If your father’s house was his primary residence, and he wasn’t renting it out, a total capital gains tax exemption might apply if:
- The house is sold within two years of his death or
- One of the following people lived in the house after his death until it was sold:
- His spouse (unless separated),
- Someone with a right to live in the home under the will or
- The beneficiary is selling the home.
For example, if your father’s house was his primary residence, and you sell it within two years, you might not have to pay CGT. However, if you sell it after 10 years, the tax implications will depend on how the property has been used.
There are also provisions for extending the two-year window in exceptional cases, like if the will is contested or unusually complex.
Inheriting Foreign Property
Suppose you’re an Australian resident who inherits foreign property from a non-resident. In that case, the cost base is typically set at the market value at the time of the previous owner’s death. For example, if you inherit a house from your uncle in the UK, the cost base is likely to be the house’s value at the date of his passing.
If you sell the property and make a taxable gain, you might be able to claim a CGT discount, but this could be less than the usual 50%. If you’re also taxed on the gain in the country where the property is located, you may be able to offset that against the tax you owe in Australia.
Need Help Navigating Inheritance Taxes?
Inheriting assets can be complicated, especially when managing the tax side of things. If you’d like help with estate planning or understanding the tax implications of an inheritance, reach out to us today. We’re here to guide you through the process.