Inheriting a previously inherited property

Quite often, an inherited property comes with more than just memories. In fact, if you’re inheriting a property that has previously been inherited, things can get financially complicated—especially when it comes to capital gains tax (CGT). Understanding how CGT applies in these situations is key to avoiding unexpected costs down the track.

At First Financial, we specialise in wealth-building strategies that help you grow your assets and retire with confidence. Generational assets can be a valuable part of your financial journey, and with the right approach, they can support long-term goals.

Here’s what you need to know if you’re inheriting a property that’s already been passed down.

When it comes to the CGT implications of an inherited property that has previously been inherited, there are key factors to consider. Most importantly, CGT is only triggered when the property is sold, not when it’s inherited. Simply receiving the property does not result in an immediate tax liability.

Additionally, a property’s CGT status is determined by its original purchase date. Properties bought before 20 September 1985 are considered pre-CGT assets and are generally exempt from this tax. However, properties purchased after this date are subject to CGT when sold.

When a property changes hands through inheritance, its CGT status can shift. A pre-CGT asset may become subject to CGT if it was inherited after 20 September 1985, with tax calculated on the gain from the date of the first inheritance. This makes understanding the property’s ownership history essential.

Capital Gains Tax (CGT) rules for properties received through bequest ensure that capital growth is taxed fairly, regardless of how many times the property has changed hands.

Unlike regular property transactions, where the purchase and sale dates are clear-cut, inherited properties introduce complexity because ownership transfers without a traditional sale.

The tax system prevents significant gains from going untaxed when ownership is transferred within families rather than through market sales.

This ensures any increase in the property’s value over time is still subject to CGT when it is eventually sold.

Ultimately, CGT rules aim to create consistency in taxing capital growth, whether it stems from a direct purchase or wealth passed through generations.

For pre-CGT assets (purchased before 20 September 1985), CGT does not apply to the period before this date. However, if the property is inherited after 20 September 1985, CGT will apply to the capital gain from the date of inheritance to the eventual sale. The property’s market value at the time of inheritance becomes the new cost base for calculating the gain.

For post-CGT assets (purchased after 20 September 1985), CGT is calculated from the original purchase date, regardless of how many times the property has been inherited. This means the capital gain is based on the increase in value from the original purchase price through to the final sale, with no resets at each inheritance event.

The critical factor in CGT calculations for previously inherited properties is recognising that each inheritance event does not create a separate CGT event. As previously mentioned, CGT is only triggered when the property is sold. The inheritance process itself is designed to defer tax obligations for a seamless transition without immediate tax consequences.

The timing of the property sale can significantly impact CGT liability. If you hold the inherited property for more than 12 months before selling, you may be eligible for a 50% CGT discount (for individuals). This applies to the length of your ownership, not how long it was held by the previous owners. Even if the property has been inherited multiple times, each new owner must meet this minimum ownership period in order to qualify.

If you live in an inherited property as your primary residence, you may qualify for significant CGT benefits. You could be eligible for a full or partial exemption on the sale, depending on factors like the duration of your residence and the property’s use prior to inheritance.

If you’re not well-versed in inheritance law and CGT, seeking professional advice is essential to maximise the financial benefit of your new asset while minimising tax liability. An experienced financial adviser can help you assess your options, including optimal sale timing, tax-effective ownership structures and any applicable concessions.

While CGT is a common consideration in investment property sales and can apply to the sale of an inherited property, it becomes more complex when the property has been inherited more than once. If you are in this situation or expect to be in the future, seeking financial advice early will help you make the most of this family gift.

At First Financial, our financial planning services are tailored to your individual needs and circumstances.

Our deep understanding of financial legislation, tax implications and asset management means we’re well-equipped to help you navigate the detailed considerations involved in inheritance matters with confidence and clarity.

To learn more about CGT, inheriting a previously inherited property or to get started on the pathway to wealth today, contact a friendly member of our team.

Read more financial planning articles.