Equity and Wills with multiple beneficiaries

When the time comes to prepare a Will, you or your client may decide to leave particular assets to specific beneficiaries. When doing this, it pays also to consider the tax liability that the beneficiary may be faced with when they eventually sell the asset that they inherit, as you may unintentionally leave one beneficiary with a higher tax liability than the other.

Current at 1 November 2021

Equity and Wills with multiple beneficiaries

When the time comes to prepare a Will, you or your client may decide to leave particular assets to specific beneficiaries. When doing this, it pays also to consider the tax liability that the beneficiary may be faced with when they eventually sell the asset that they inherit, as you may unintentionally leave one beneficiary with a higher tax liability than the other.

Current at 1 November 2021

Where a beneficiary inherits an asset such as the testator’s main residence or another asset purchased pre-CGT (i.e. before the introduction of capital gains tax on 19 September 1985), the beneficiary may be entitled to significant tax benefits/concessions when they eventually sell this asset. Where a beneficiary inherits an asset that the testator had purchased post-CGT, they may not be entitled to the same tax benefits and concessions as the beneficiary that inherited the pre-CGT asset.

Let’s look at an example

Joan has two rental properties to bequeath to her children, Child A and Child B and believes both properties are approximately of the same value in the market. Joan purchased House A (before the introduction of the CGT) and House B in 1998 (post-CGT).

The following table shows that Child A would only need to add $25,000 to their taxable income as they have inherited a preCGT asset and thus use the Market Value at the testator’s date of death as the cost base for the asset. Meanwhile, Child B would need to add a whopping $165,000 to their taxable income as they have inherited a post-CGT asset and thus the Cost Base of the testator also becomes the cost base of the beneficiary resulting in a higher assessable net gain.

For the purposes of our example, we will assume that the beneficiaries decide to hold their properties for three years, sell at the same time, and they do not have any personal carried forward capital losses to offset their respective capital gain.

Child A
House A
Pre CGT asset
Child B
House B
Post CGT asset
Market value at date of death
$400,000
Testator purchase price
$120,000 in 1998
Beneficiary’s proceeds after sale
$450,000
Beneficiary’s proceeds after sale
$450,000
Gross Gain
$50,000
Gross Gain
$330,000
50% Discount
$25,000
50% Discount
$165,000
Net Gain added to beneficiary’s taxable income
$25,000
Net Gain added to beneficiary’s taxable income
$165,000

 

The tax payable by Child A and Child B would be their respective marginal tax rates. It is worth noting that the main residence of the testator would be exempt from CGT if sold within two years of the date of death of the testator, providing child A with even a larger tax benefit.

Tax may not be an important factor that a testator may consider when preparing their Will, however, it may be a point to raise with clients especially where there are multiple beneficiaries and equity is the primary objective.

 

 

Feel free to contact our team should you want to discuss this topic further and potentially have clients who may be in this situation.

 

 

This publication is not intended to be and should not be used as a substitute for taking taxation advice in any specific situation. The information in this publication may be subject to change as taxation, superannuation and related laws and practices alter frequently and without warning.  Neither BNR Partners Pty Ltd, our employees or agents are responsible for any errors or omissions or any actions taken or not taken on the basis of this publication.