Possible CGT implications when a family member passes

When Kirsty’s Dad died, he left the house to her mother, but the holiday home (purchased in 1990) was left to his three kids. However, Kirsty’s mum was granted a life interest in the holiday home. Today I’ll explain what the tax consequences are when her mum dies, and the kids inherit the holiday home.

As the holiday home was passed onto the children on the death of their father, any potential capital gain is exempt in their father’s hands at that time, and they are deemed to have acquired the property at his date of death and at his tax cost base. Therefore, if they later sell it, the resulting capital gain would have been similar to as if their father had sold it, albeit the selling price may have gone up since his death.

The granting of the life interest on the holiday home, has no immediate impact on the children. Although her mother has full rights to live and use the holiday home, and perhaps rent it out, she doesn’t have legal ownership. On her death, that life interest is extinguished and Kirsty and her siblings have full-unfettered access and use of the property to deal with as they wish. When they sell the property, they will be deemed to have acquired it, at the date of their fathers death (not their mother) and at his cost base. This is regardless how long your mother had the life interest. So Kirsty and her siblings could be up for a large capital gain if the property had been held for many years and appreciated in value.

If the property in question was the family home, in which their mother and father had lived in as their main residence, and to which their mother was instead granted a life interest. Then, providing she continued to live there as her main residence, on her death, Kristy and her siblings, could sell the property soon after, possibly without capital gains tax consequences, as they would be entitled to utilise their father and then mothers main residence exemption.

However, it is important that individuals seek advice on this as the law can be quite complicated and there are many variables involved that may reduce someones exemption period. For example, there are also special rules that apply for pre-CGT properties or where the property was used to earn assessable income. The exemption can also be extended should someone be granted a life interest under the Will and use it as their main residence or if it on passing to you was their main residence. Care also needs to be taken at how the property is transferred from the estate. Also, remember to take into account any periods if the property was rented.