In relation to capital gains tax and estate planning, the main concern is the principal or main residence. Discuss the capital gains tax implications.
Where the asset in question is the deceased’s main residence, the main residence exemption to the dwelling will continue to apply provided the dwelling is either sold, or passed on to a beneficiary who will continue to use the dwelling as his or her main residence, within two years of the deceased’s date of death.
It is not uncommon, however, for wills to pass the family home on to the surviving spouse pursuant to a life interest, particularly in the circumstances of a second relationship, where both spouses wish to protect their interests in the family home for their respective children. In order for the main residence exemption to be maintained for the lifetime of the survivor, it is essential that the will give the surviving spouse not just a general life interest in the dwelling, but also an express right of occupation in the property.
Your client’s Aunt Jenny recently died. Aunt Jenny had a rental property on the mid north coast of New South Wales and the client has decided to sell the property as soon as possible. You are aware that there are capital gains tax implications and have asked your client for information you need to obtain to calculate the capital gains tax liability. Discuss what types of questions you might need to ask your client.
1 Was the property also Aunt Jenny’s prime residence?
2 The acquisition costs including acquisition costs, for example legal fees.
3 Transfer costs such as stamp duty transfer costs etc.
4 Incidental costs re improvements.
5 Capital expenditure.
6 Notional disposal costs.
Can a capital loss be used after someone dies?
You cannot take a capital loss with you when you die. Losses cannot:
- Be used in the first return of the estate
- Be passed on to beneficiaries
- Offset other income from 1 July to death
Discuss the CGT consequences of CGT assets passing to beneficiaries?
A gain or loss on passing of the asset from your legal personal representative (executor) to a beneficiary of an estate is disregarded.
If the beneficiary then disposes of an asset they can include any capital expenditure of the legal personal representative in their cost base.
If a CGT asset is acquired before 20 Sep 1985 it will be deemed to be acquired by the beneficiary or legal personal representative at consideration equal to the market value of the asset on the date of death.
If a CGT asset is acquired after 19 Sep 1985 the beneficiary or legal personal representative will essentially inherit the cost base of the deceased.
Where the legal personal representative sells the asset to a beneficiary and the beneficiary acquires the asset, as a purchaser there is a CGT event and potential capital gains tax will apply. This is also the case in respect of options granted under a Will to purchase asset of the estate.
Division 128 only applies to assets owned by the deceased at death. These provisions do not make allowance for assets purchased by the executor.
What are the consequences of CGT assets passing to non-resident beneficiaries?
What strategy could be used to alleviate any CGT implications on the estate from passing assets to non-resident beneficiaries?
Where an asset passes directly to a non-resident beneficiary and the asset does not satisfy the test of ‘necessary connection’, the passing of the asset will trigger a CGT event and a tax liability on the estate will result. A strategy to avoid CGT is to have the asset pass into a resident testamentary trust and have the trust benefit the non-resident beneficiary.