Inheriting shares from a deceased person does not in itself have any immediate tax consequences when the shares pass to the deceased person’s beneficiary, their executor, or from the executor to a beneficiary.
This means that if you inherit shares, the capital gain on the asset is disregarded at the date you inherited them and you will not have to pay capital gains tax until you actually dispose of the shares, which could be some time away.
When you inherit the shares, the deemed cost at which you inherit them (which will be deducted from your proceeds when you choose to sell, to give you a capital gain or loss) depends on when the deceased first acquired them:
- If the shares were acquired before September 20, 1985, you inherit them for their market value at the deceased’s date of death. You need to hold on to the shares for at least a further 12 months in order to claim the 50% CGT discount; or
- if the shares were acquired on or after September 20, 1985, you inherit them for their original cost to the deceased (the price they originally paid). The 50% CGT discount is available to you from the date of death; there is no minimum holding period.
As an example, if the shares were bought in 1980 by the deceased for $10,000 and they were valued at $40,000 when passing to the beneficiary upon the death of the original holder in 2020, no tax is immediately payable.
If the beneficiary subsequently sells the shares for $50,000 in 2022 then a tax liability would arise for $10,000 (the $50,000 proceeds less their market value at the date of death, $40,000).
If the shares were held by the beneficiary for more than 12 months in total, starting from the date of death (which appears to be the case, as the beneficiary inherited the shares back in 2020), then the beneficiary would also be eligible for the 50 per cent CGT discount, which means that the net capital gain would be $10,000 x 50% = $5,000.
Conversely, if the shares were bought in 1990 but all other figures remain the same as the previous example, there would still be no capital gains tax liability on the death of the individual but the beneficiary will be subject to capital gains tax of $40,000 when they ultimately sell the shares.
This is worked out as sales proceeds of $50,000 less the original cost of $10,000 (based on the cost of the shares when they were first acquired). Because the deemed date of acquisition was back in 1990, the 50% CGT discount applies straight away, therefore the beneficiary could sell them immediately and still get the discount. The net gain after the discount is applied is $20,000 ($40,000 times 50%).
Consider lifetime gifts
The above presupposes that you inherit the shares on the death of the individual. Most people use their Will to determine how their assets will be distributed after death but it can be worthwhile transferring some assets before death in the right circumstances.
If the soon-to-be-deceased has brought forward (or current year) capital losses, they can transfer CGT assets (such as shares and property) to their beneficiaries while they are still alive and use their capital losses to shelter the capital gains which will arise. So, the individual gets to transfer the assets tax-free and the beneficiaries will also benefit because they’ll acquire the assets at a higher CGT cost base, meaning lower CGT bills for them when they ultimately sell the assets (they will acquire the assets for market value as a result of a lifetime transfer).
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Mark Chapman is the director of tax communications at H&R Block (NYSE:HRB). As well as operating his own private practice, Mark spent seven years as a Senior Director with the Australian Taxation Office. Mark is a Chartered Accountant, CPA and Chartered Tax Adviser and holds a Masters of Tax Law from the University of New South Wales.