Death and the Home

One of the most frequently asked capital gains tax questions concerns the situation where a person dies leaving their home to beneficiaries of their will. Unfortunately, depending on the circumstances, the answer to the question can be very complex.

Let’s have an Example
Susan and Doug bought a house in 1983, a few years after they were married. It was their family home, and they raised their two children, Rachel and Belinda in that home.

The years roll by and Doug dies in 2016. The house was owned jointly with Susan, so she then becomes the 100% owner of the house. In 2017 it is decided that Susan should move into a nursing home after having a fall. The home is then rented to tenants.

In 2020, Susan also dies, and the house is left in equal shares to Rachel and Belinda, who are both adults with their own families.

When Mum dies, Rachel and Belinda are not sure what to do with the house, so they just let it continue as a rental property for several months. Eventually, they decide to sell the house and Rachel and Belinda both receive 50% of the sale proceeds. Is there any tax payable?

Issues to Consider
This common scenario raises a number of CGT issues.

Most people understand that when they sell their home (the tax law calls this their “main residence”) they don’t pay CGT. But what happens in the situation where the owner of the home (in this case Susan) isn’t living in the house when she dies? Is the house still treated as her “main residence?” What is the effect of Susan’s death on the tax position?

If the CGT exemption can be claimed, how long does Rachel and Belinda have to sell the house? Can they hold it indefinitely as a rental property and then sell it tax-free in the future?

If there is a capital gain, how is the gain calculated?

A Short Answer
In this situation Susan can continue to treat the house as her main residence for tax purposes for up to 6 years after she moved out. So, at the date of her death, even though she is living in a nursing home, the house can still be treated as her main residence for tax
purposes.

However, when Susan dies, she owns, at that time two CGT assets in relation to the house. One is the 50% acquired by her in 1983 and the other is the 50% acquired from Doug when he died. The 50% acquired by Susan in 1983 is a “pre-CGT” asset and the 50% acquired
from Doug is a “post-CGT” asset.

When Rachel and Belinda are bequeathed the house under Susan’s will, each of Rachel and Belinda acquire 50% of each of the two assets formerly held by Susan. This means there are now four assets to consider!

In summary, it is possible for Rachel and Belinda to sell the house and not pay any tax, but it depends on whether the house is sold within 2 years of the date of Susan’s death. However, even if the house is not sold within 2 years of Susan’s death, the amount of capital gains tax to be paid may be relatively small under the formula in the CGT law.

Variety of Circumstances
The above example is just one scenario in what can be a complicated issue and at a stressful time for those involved. If you are facing a situation involving the death of a person that owned a main residence, you are strongly encouraged to take advice on the tax implications.