Publication

CGT Consequences for a Will

by Paul Evans and Richard d'Apice AM
09 August 2012
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Capital Gains Tax (CGT) was introduced on 20 September 1985 and is sometimes described as a "back door death duty". Is this so?

Death is not a chargeable event and a beneficiary inherits the deceased's cost base i.e. the price the deceased paid for the asset. If the asset was purchased prior to 20 September 1985, the cost base is the open market value of the property at the date of death. Thus, any accrued gain is ignored due to the uplift in value. Contrast, where an asset is acquired post 20 September 1985; here the cost base is the deceased's purchase price. Any gain is rolled over on death and CGT will only be payable if and when the beneficiary disposes of the asset.

Meet Mary Gregory.

  • Mary has two children, Kate and Amanda.
  • Her assets comprise:
    • principal residence $2 million;
    • investment property purchased in 1986 for $150,000.00 now worth approximately $3 million;
    • holiday house purchased in 1980 for $100,000.00 now worth approximately $3 million;
    • cash $2 million.
  • Mary wants to treat her daughters equally and decides to distribute her assets as follows:
    • investment property to Kate;
    • holiday house to Amanda;
    • divide remaining balance equally between Kate and Amanda.
  • What is the issue? On the surface, it appears the daughters will be treated equally but is this the case? The answer is no due to the fact that the investment property is a post-CGT asset whereas the holiday house is a pre-CGT asset.
  • Kate's cost base for CGT purposes will be $150,000.00 whereas Amanda's will be $3 million. Thus, if both daughters decided to sell their properties say 6 months after their mother's death Amanda would receive approximately $3 million tax free whereas her sister would pay CGT at her personal tax rates on the in-built gain.
  • How can this be addressed? The Will could provide for Kate to receive an additional cash sum from the Estate to compensate for the in-built capital gain. Alternatively, Mary could simply split her Estate equally between her daughters meaning they would share equally any CGT.