Can we sell and buy back inherited shares to save on tax?
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My daughter just received some shares from her grandmother’s estate. Thinking about capital gains tax, would we be wise to sell them and buy them back now, so she doesn’t suffer too much tax later on?
Upon inheriting these shares your daughter also inherits the cost base. This is the value of the shares at the time they were purchased. If the shares were purchased before capital gains tax existed, which was in 1985, then it is assumed the cost base for your daughter is the value of the shares upon the death of her grandmother.
Upon inheriting shares, you are effectively inheriting a capital gains tax liability that will need to be paid at some point in the future.Credit: Simon Letch
Whilst there is no tax payable when your daughter inherits the shares, she is effectively inheriting a capital gains tax liability that will need to be paid at some point in the future, when she decides to sell these shares.
Your starting point then is to find the records that tell you when these shares were originally acquired. Often this is not easy, but it is crucial. The share registry might be able to assist, and if your late relative used a stockbroker or financial planner, they might be able to help with the details.
Regarding the advisability of selling the shares now, that depends on the future tax position of your daughter. Let’s assume that she is young and earning little or no income today. In that scenario, it probably would make sense to sell these shares, trigger the capital gain, and then reinvest the proceeds. Because a capital gain is added on to other income to determine how much tax is payable, you will get the lowest tax result if the capital gain is triggered in a year when her income is low.
This is unusual, as ordinarily, we want to delay triggering capital gains for as long as possible. For an ordinary investor, the longer you can retain that value for yourself by earning dividend income, the better.
Note that there are rules around selling and buying back shares for tax purposes, known as the “wash sale” rules. To my knowledge, this is usually applied relating to tax losses, which isn’t the case here, but if you are dealing with a significant amount of money it would be worth getting some specialist tax advice on this point.
One potential way to manage this issue would be to take the opportunity to diversify your daughters’ investments following the sale. Rather than buy back what was just sold, use the proceeds to purchase investments that make sense for today and the next 20 or 30 years.
I’m about to sign on the dotted line for a car loan, and it talks about a balloon payment. What is this?
Balloon payments are a somewhat unusual feature of car loans (and other equipment finance). With most loans, at the end of the loan term, you will have completely paid off the debt. However, with this type of loan, at the end of the loan term there remains an amount outstanding, and that is the balloon payment. It should very roughly reflect the value of the car at that point so that you could sell the vehicle and use those proceeds to clear the debt.
When you get to the end of your loan term and the balloon payment is due, if you wish to keep the car, most lenders will offer you a solution where you can pay off that balloon amount over the next few years.
Paul Benson is a Certified Financial Planner, and the host of the Financial Autonomy podcast. Send your questions to: [email protected]
- Advice given in this article is general in nature and is not intended to influence readers’ decisions about investing or financial products. They should always seek their own professional advice that takes into account their own personal circumstances before making any financial decisions.
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