Inheriting property, shares, or other investments can provide significant financial benefit. However, it can also introduce complex capital gains tax (CGT) considerations that many beneficiaries are not initially aware of.
A key factor is whether the asset was originally acquired before or after capital gains tax (CGT) was introduced on 20 September 1985.
How Inherited Assets Are Treated for CGT
The tax outcome depends largely on when the deceased acquired the asset and how it is later disposed of by the beneficiary.
Post‑CGT assets (purchased after 20 September 1985)
If the deceased acquired the asset after CGT was introduced, you effectively inherit their cost base. This includes the original purchase price plus associated costs. When the asset is eventually sold, any capital gain or loss is calculated based on this inherited cost base. This means the original purchase history remains relevant for tax purposes.
Pre‑CGT assets (purchased before 20 September 1985)
If the asset was acquired before CGT commenced, it is generally treated differently.
In most cases, the cost base is reset to the market value of the asset at the date of death. This reset is important, as it becomes the new reference point for any future capital gain or loss when the asset is sold.
This can significantly reduce tax complexity, particularly where original purchase records are unavailable or span many decades.
Does the Type of Asset Make a Difference?
Yes. Different asset classes can be subject to different rules and exemptions.
Property
The family home can be sold CGT‑free if the sale occurs within two years of the deceased’s death (regardless of pre‑CGT or post‑CGT acquisition).
The exemption may be reduced or lost if:
- the sale occurs outside the two-year window
- the property is rented out during the estate administration period
- it is not treated as the main residence for the required period
If conditions for exemption are not met:
- A pre-CGT main residence will generally use market value at date of death as the cost base
- A post-CGT property retains the original cost base and adjustments
Shares and investments
For inherited shares:
- Pre‑CGT shares: Cost base resets to market value at death.
- Post‑CGT shares: You inherit the original cost base and holding history.
Accurate records—acquisition dates, original costs, reinvested dividends, capital returns—are essential to correctly calculate CGT when you sell.
What Records and Valuations Do You Need?
For pre‑CGT assets, obtaining a valuation at the date of death is crucial. Without one, the ATO may apply its own estimate, which may not be favourable.
For post‑CGT assets, you’ll need documentation showing:
- original purchase price
- associated purchase costs
- improvements made during ownership
- any adjustments, such as capital works or reinvested distributions
Good record‑keeping avoids disputes, errors, and unnecessary tax when assets are sold.
Common Scenarios to Consider
Joint inheritances:
Where multiple beneficiaries inherit an asset, each party is responsible for CGT on their share of the asset. This can create complexity around timing and valuation consistency.
Converting an inherited home into an investment property:
If an inherited home is rented out, the availability of the main residence exemption may be reduced or lost, potentially increasing CGT payable when the property is eventually sold.
Common Misunderstandings
“Inherited assets are always exempt from CGT.”
Not always. While exemptions apply such as the main residence exemption may apply, many inherited assets remain subject to CGT when sold.
“No valuation is needed if the asset is inherited.”
This is one of the most costly mistakes. Without an independent valuation, beneficiaries may pay far more CGT than necessary.
“Transferring the asset avoids tax.”
Transferring ownerships does not eliminate CGT obligations. They may actually trigger them.
Why Professional Advice Matters
The tax rules surrounding inherited assets are detailed and detailed and highly dependent on individual circumstances. Small differences in timing, use, or documentation can materially affect the tax outcome.
A Supervision Group specialist can help you:
- confirming the correct cost base
- Identifying applicable exemptions
- avoiding common traps
- planning the most tax‑efficient timing for asset disposal
With the right advice and documentation, beneficiaries can make informed financial decisions and avoid unnecessary tax exposure.
Final Thoughts
Inherited assets can represent significant value, but they also carry important tax implications that should not be overlooked. Understanding whether an asset is pre-CGT or post-CGT, and ensuring proper valuation and record-keeping, is essential to managing future tax outcomes effectively.
Need help understanding your obligations or planning ahead?
Contact us—our team can help you navigate CGT rules and manage inherited assets with confidence.
