A significant part of a deceased estate is commonly a property. Often, the family will wish the sell the property and split the proceeds accordingly. Apart from the general hassles of selling a property this can be fairly straight forward with no Capital Gains Tax implications. But you should be aware how CGT can be applied. You may get a surprise.
There can be a lot involved
We provide a lot of advice regarding the administration and taxation of deceased estates. There are significant tax consequences of undertaking various alternatives with administering estates. Compliance requirements include preparation of the final income tax return of the deceased as well as preparation of estate income tax returns for the period that the estate is being administered. We can prepare cost base summaries of investments held by the deceased which are necessary either because investments are sold within the estate, or for the beneficiaries if the investments are distributed out of the estate.
Tax on property can be a significant issue. The taxation issues of inheriting property can be very complex. We suggest that if you do inherit a property on your own or importantly when there are other beneficiaries and decisions have to be made “by committee”, have a quick word to us. We have seen several occasions where assumptions were made and significant sums lost as a result.
When someone dies, a capital gain or loss is generally disregarded when the property passes:
to the deceased person's executor or other legal personal representative
to the deceased person's beneficiary such as next of kin or a person named in the will
from the deceased person's legal personal representative to a beneficiary.
But CGT may apply when…
However, the CGT exception described above does not apply if the property passes from the deceased to a tax-advantaged entity (such as a charity) or a foreign resident. There may also be implications if the family (beneficiaries) hold onto the property for too long.
So if you inherit a property that was purchased after CGT started on 20 September 1985 CGT may apply; the degree to which it does depends on:
when the deceased person acquired the property
when they died
whether the property has been used for income-producing purposes.
You can avoid paying CGT if the property was the deceased person’s main residence and the sale is completed within two years of the date of their death. CGT may apply if the deceased person's legal personal representative sells the property as part of winding up their estate.