Receiving an inheritance can significantly change your financial situation, however people are often unsure as to what they should do next.
The bequest is often a result of the hard work and sacrifice of your loved one and you want to honour them by utilising their gift wisely.
Some of the key issues to be aware of when you receive an inheritance are summarised below.
Australia is one of the only developed countries that doesn’t have an inheritance tax. Before you get too excited there are still some tax consequences to be aware of.
The most commonly asked question is whether Capital Gains Tax is payable when the main residence is sold. Pleasingly, a property that was the principal residence of the deceased just before their death is generally exempt from Capital Gains Tax if sold within two years of passing.
With regards to investment assets like shares and property, determining the cost base for the beneficiary (cost for tax purposes) will be heavily dependent on whether the deceased person acquired the assets before or after 20 September 1985.
It’s important to remember that Capital Gains Tax is only payable when an asset is sold. So, whilst there are no direct inheritance taxes there may be a dormant tax liability that would be triggered by any sale.
This is particularly important where the splitting of an estate involves beneficiaries receiving different assets. Whilst the market values may appear to result in an equitable split the after tax outcome may differ significantly.
Whilst superannuation pension payments may have been received tax free by your loved one during their lifetime, the resulting death benefit payment is not necessarily received tax free.
In particular there may be a degree of tax to pay if it’s received by those who are not financially dependent on the deceased eg adult children.
It’s critical you understand how your potential inheritance may be impacted by this tax, especially where the payment is made to the estate rather than directly to individual beneficiaries.
What to do with it?
Should you pay off your mortgage, purchase an investment property or put more money into superannuation?
What you do with your inheritance will largely depend on your personal situation, what you’re seeking to achieve and the form the bequest was received ie is it liquid cash or investments with unrealised Capital Gains Tax liabilities?
The most common theme we hear from those receiving an inheritance is their desire “not to waste it”.
An inheritance can significantly improve your financial position, however the sense of duty to do something meaningful with this bequest, coupled with the complex tax implications can leave you feeling overwhelmed.
The best use of this gift will depend on your personal situation and what you’re seeking to achieve.
Speaking with a Financial Planner will help explore your options and determine the right path forward for you.
ACADIA WEALTH ADVICE – TAKING THE JOURNEY WITH YOU
This information is general advice and does not take into account any person’s objectives, financial situation or needs.