Succession Series: What You Need to Know About Tax When Inheriting Property

No, not that Succession series. Each month, we’ll be providing fresh insights into the complexities of transferring property, whether it’s estate planning, managing inheritances, or business succession. This month, we’re delving into the tax implications of inheriting property.

While dividing up assets in an estate is a difficult and emotional task, it’s equally important to consider the tax consequences for your beneficiaries. The way your assets pass to them can significantly impact their financial future, depending on the nature of the assets and the beneficiaries’ tax profile, such as their residency status.

Inheriting Cash

When cash passes from the deceased to the estate and eventually to a beneficiary, there are typically no direct tax issues to address, assuming the cash is denominated in AUD. Cash inheritances are the simplest type of inheritance from a tax perspective.

Inheriting Assets

Death is considered a taxing event, and when ownership of an asset changes, it usually triggers a capital gains tax (CGT) event. However, Australian tax law provides some relief from CGT in the case of death. In most instances, a capital gain or loss arising from death is disregarded unless the asset is transferred to:

• An exempt entity (with some exceptions, such as charitable entities with deductible gift recipient status);
• A complying superannuation fund trustee; or
• A foreign entity, and the asset is not classified as taxable Australian property.

The CGT exemption applies when the asset is passed to the deceased’s legal personal representative (i.e., executor) or a beneficiary of the estate, as long as these entities are not on the list above. Once the asset has been transferred, the beneficiary becomes responsible for managing any tax consequences when the asset is eventually sold.

Inheriting Shares

Let’s say you inherit a portfolio of ASX-listed shares from your mother’s estate. The tax implications will depend on your mother’s residency status at the time of her death and when she acquired the shares—whether before or after 20 September 1985 (pre-CGT or post-CGT).

• If your mother was an Australian resident for tax purposes and the shares were purchased post-CGT, the cost base is the original purchase price. For example, if your mother purchased BHP shares for $17.82 on 2 January 1997, you would calculate the capital gain or loss based on this amount when you sell the shares.
• If your mother was an Australian resident and the shares were acquired pre-CGT, the cost base is reset to the market value at the date of her death. For instance, if she passed away on 1 October 2024 and the share price at close was $45.96, this becomes your cost base for future capital gains tax calculations.
• If your mother was a non-resident when she died, the cost base is typically based on the market value of the shares at the date of death.

Shares can be tricky to manage in an estate due to the potential fluctuations in value over time. What was a modest portfolio 20 years ago could now be a significant asset that requires careful planning.

Inheriting Property

Let’s assume you inherit an Australian residential property from your father. For tax purposes, you are generally deemed to have acquired the property at the date of his death. The executor and/or beneficiaries usually inherit the cost base of the property as it was when the deceased owned it. However, special rules apply for properties acquired before CGT was introduced or when the property was the deceased’s main residence.

If the property was your father’s main residence, a full CGT exemption might apply to the executor or beneficiary if one of the following conditions is met:

• The property is sold within two years of the date of death; or
• The property was used as the main residence of one of the following people from the date of death until it was sold:
  • The deceased’s spouse (unless they were separated);
  • An individual with a right to occupy the property under the deceased’s will; or
  • The beneficiary who is disposing of the property.

For example, if the property was your father’s main residence, and you sell it within two years, no CGT will apply. However, if you sell it after 10 years, the CGT impact will depend on how the property was used after his death.

Inheriting Foreign Property

If you inherit foreign property from a non-resident, the cost base for CGT is usually the market value at the date of death. If the property generates a taxable gain when sold, it’s important to consider whether the CGT discount applies. The discount is often less than 50%, but any overseas tax paid on the gain can sometimes offset the amount payable in Australia.

Navigating the Complexities of Inheritance

Handling an inheritance can be challenging, especially when tax implications are involved. Whether you’re inheriting property, shares, or foreign assets, it’s essential to have expert guidance. At Modoras, we offer personalised estate planning services to help you understand and manage the tax impact of your inheritance. Contact us today for assistance tailored to your situation.