When Inheriting a Home Isn’t Tax-Free

When a family member passes away, dealing with their home is often one of the most emotionally and financially significant aspects of administering an estate.

Many people assume that if someone continues living in the deceased’s home, the property will remain exempt from capital gains tax (CGT) when they eventually sell it. A newly released draft ruling from the Australian Taxation Office (ATO) highlights that this is not always the case — and that the detail in estate planning documents matters greatly.

What is the Draft Ruling About?

The ATO’s draft ruling looks at when an inherited property can continue to qualify for the CGT main residence exemption after the owner’s death.

In particular, it clarifies what it means for someone to have a “right to occupy the dwelling under the deceased’s Will”. This is a key requirement for maintaining the exemption in certain circumstances.

While the ruling is still in draft form, it reflects the ATO’s current thinking and is highly relevant for anyone who involves themselves in estate planning, administering estates, or inheriting property.

The key takeaway: For the CGT exemption to apply, the right to live in the property must be clearly written into the deceased’s Will.

If it isn’t, the exemption may not apply — even if someone does, in practice, live in the home as their main residence.

The main points (and why it isn’t surprising)

The ATO’s position is largely consistent with existing law and practice. In summary:

The right to occupy a dwelling must be expressly granted under the terms of the deceased’s Will.
The individual must be specifically named in the Will.
A right granted by an executor or trustee using a broad discretion under the Will does not qualify.
A right created under a separate agreement, such as a deed of arrangement between beneficiaries, does not qualify.

In short, informal arrangements, trustee discretion, or post-death agreements are not enough to preserve the CGT exemption.

Why Wording Matters

The draft ruling reinforces a long-standing principle: if a Will is silent or unclear, tax outcomes can change significantly.

For the CGT main residence exemption to continue, the Will itself must clearly set out who can live in the property and on what terms. Assumptions or informal “understandings” between family members are not sufficient from the ATO’s perspective.

What counts as a valid “right to occupy”?

According to the draft ruling, a person will generally only have a valid right to occupy the home if:

The Will specifically names them, and
The Will expressly grants them the right to live in the property.

Where this is clearly set out, the property can usually continue to qualify for the CGT main residence exemption while that person lives there.

What doesn’t count?

The ATO makes it clear that a right to occupy will not qualify if it arises from:

An informal arrangement between beneficiaries.
A separate deed of arrangement.
A decision made by an executor or trustee using a broad discretion.
A testamentary trust (even if attached to the Will), unless the Will itself grants the right.
Continuing to live in the property after a time-limited right in the Will has expired.

In these cases, the right to occupy is not considered to come “under the Will”, and the CGT exemption may be lost — or only partially available.

Important exceptions to be aware of

There are a few important nuances:

Court orders – If a court grants someone the right to live in the property (for example, under family provision legislation), this is treated as if it were written into the Will.

Time-limited rights – If a Will grants someone the right to live in the home for a set period (such as 12 or 18 months), the full CGT exemption generally only applies for that period. Remaining in the property beyond that time may result in a partial CGT liability.

A Key Area of Concern: Testamentary Trusts

While much of the draft ruling reflects existing expectations, there are potential concerns about the ATO’s treatment of testamentary trusts.

In the draft determination, the ATO states that:

A testamentary trust is separate from the deceased estate.
Rights granted under a testamentary trust deed are not rights granted “under the Will”.
Even where a testamentary trust is created by the Will, a right to occupy granted under the trust may not qualify for the CGT exemption.

This interpretation has the potential to affect many common estate planning structures, including life and remainder trusts. These are often used to balance housing security for one person with long-term succession planning for others.

As a result, there is concern that the draft ruling may have broader implications than intended, particularly for estates that were structured carefully under existing professional advice.

Why This All Matters

This draft ruling highlights how the following connect: estate planning, tax outcomes, and legal drafting.

Seemingly small details — such as how to word a Will, or where you document a right to occupy — can have significant tax consequences for beneficiaries and estates down the track.

It’s particularly relevant for:

Families expecting someone to “stay in the home for a while”.
Blended families and succession planning.
Estate plans involving testamentary trusts.
Executors and trustees administering deceased estates.

What Should You Do Next?

At this stage, the ruling is not final, but it serves as an important reminder that:

Estate planning decisions can have long-term tax consequences.
The interaction between Wills, trusts, and tax law is complex.
Structures that worked well in the past may warrant review as interpretations evolve.

If your estate planning involves property — or if you are administering or inheriting a deceased estate — it’s important they properly consider the legal and tax implications.

At Aintree Group, our legal and accounting teams work together to help clients navigate estate planning, deceased estates, and property-related tax outcomes with clarity and confidence.

If you’d like advice tailored to your situation, or help reviewing an existing Will or estate plan, our team is here to support you. Get in touch with us at legal@aintreegroup.com.au.

This article is based on a draft ATO ruling and reflects the ATO’s current position at the time of writing. Draft rulings are subject to change before finalisation.

This is general advice only and has not been prepared with your situation and needs in mind. For individual and personalised advice, we highly recommend that you seek out proper professional advice from your lawyer.