Recently reading a copy of Jane Eyre, when she was asked where the wicked go after death, Jane replied ‘They go to hell’. When asked what should be done to avoid hell, Jane answered ‘I must keep in good health, and not die.’
But of course the grim reaper comes to us all eventually and when he does, that other grim reaper, the taxman is hot on his heels! So the inevitable, death and taxes! The tax rules for inheritance of assets can be complicated, so lets look at a few important things about death and capital gains taxes that are useful to know. We’ve selected three key areas of inheritance we find can cause confusion: the family home, investment assets and capital losses.
The Main Residence
The main residence of the deceased is exempt from capital gains tax if it is inherited by certain specified individuals, for example, the spouse of the deceased. But whether it should be exempt from CGT can depend on the date the residence was acquired, the deceased’s use of the residence and how long a beneficiary has held the residence after the deceased died.
If the residence was purchased pre capital gains tax then it is treated as having been acquired by a beneficiary at market value on the deceased’s date of death. So the pre capital gains tax asset becomes a post capital gains asset to a beneficiary. A capital gains tax exemption applies if the residence is sold within two years of the date of death (and that means settlement of sale within two years, not just when the contract is signed).
For a post capital gains tax residence, a capital gains tax exemption will only apply if the residence was the deceased’s main residence just before death and if it had not been used for income producing purposes.
The Investment Portfolio
With public company shares or investment property, for a pre capital gains tax asset (purchased before 20 September 1985) the cost base to the beneficiary is the market value at the date of death, which means capital gains liability will only start accruing from this date. If the purchase date of the asset of the deceased is post the introduction of capital gains tax then the cost base to a beneficiary is the same as the cost base for the deceased.
Taking up capital losses is a legitimate strategy to minimise tax. But if the deceased has capital losses on the date of death, then unfortunately those losses die too and are not available to their Estate. Knowing this will help you and your dependants or benefactors plan your capital loss absorption and not waste any potential capital write-offs.
So in hindsight maybe it would be better to keep in good health and not die after all!