What to do when you inherit shares

Inheriting assets can be a messy business. While you are dealing with the emotional fallout of a loved one’s death, along comes the paperwork and onerous legal requirements.

Transferring some assets are relatively straightforward, such as cash in bank accounts, but others require a bit more paperwork. Shares are on that list.

Firstly, you will need to gather all evidence of ownership. This is where a frank discussion while the person is still alive will come in handy.

Often older people will not keep things in one place, or have bought shares at different times from different brokerages, they may have even bought shares decades ago, and have not kept track of the paperwork.

Save yourself the frustration

Sorting all this out before the person dies can save time and frustration. It may put their mind at rest as well. It may pay to insist their will be updated to include all this information.

If you do not have access to such information, you may have to go on a hunt. Previous tax returns will help, as will any correspondence from companies and records of payments into bank accounts. If you are struggling, professional advice from an accountant or tax accountant can help.

There are two types of shares in Australia, according to SellMyShares:

• CHESS (Broker) Sponsored. This is where a broker registers the investor on CHESS (Clearing House Sub Register System), which is a system managed by the ASX (Australian Securities Exchange). A unique Holders Identification Number (HIN) is issued to the investor and provides a link between them and the broker. All transactions between the investor and that specific broker are recorded against the HIN.
• Issuer Sponsored. Under this system, the investor has a relationship with each of the companies they hold shares in and they are given a Shareholder Registry Number (SRN) that links them to each specific holding. The details of the investor holdings will be recorded on an electronic register maintained by a share registry.

Required paperwork

You will need either or both of these numbers before you can transfer any shares. However, to complicate matters, if the deceased used more than one broker, there may be more than one HIN. Which is just another example of why it’s a good idea to get all this sorted before someone passes away.

At a minimum you will also need the death certificate, certified copy of the last will and testament, and the executor will also have to prove their identity. Executors may also have to provide evidence of the identity of the beneficiaries.

Other paperwork may be required depending on the trading house.

The transfer

You will need a ASX-registered stockbroker to transfer the shares. Once you have the required paperwork, they can proceed with the transfer.

So what do you do if you plan to sell the shares?

The good news is there is no inheritance tax in Australia, the bad news is there are tax obligations if you sell or receive income from shares, which is where things get tricky.

If you plan to sell the shares, your first step is to check when the shares were acquired. If they were purchased before 20 September 1985 that was pre-capital gains tax. As such the cost basis is valued as from the day the person dies.

Cost basis is the original value or purchase price of an asset. It’s used to calculate capital gains or losses, which is the difference between the purchase and the selling price. The capital gains will be used to calculate how much capital gains tax (CGT) you will pay on any sale.

Tax implications

However, if the owner added to the shares after the above date, i.e. bought more or set up a dividend reinvestment plan, then according to the Australian Tax Office the cost base of this single asset is the total of:

• the cost base of the major improvement on the day the person died
• the market value of the pre-CGT asset, excluding the improvement, on the day the deceased died.

Depending on the size of the estate, paying CGT if you decide to sell the shares could be quite onerous.

You might think it’s a good idea to sell all the shares and pay off your house, but the CGT you would have to pay could cancel out any advantage of closing out your mortgage.

It may be better to sell the shares in packages over several years to spread the tax burden.

Time to get help

Unless you have a high degree of financial literacy, consulting a tax accountant or financial planner should help you minimise the tax or plan a selling strategy.

If you don’t plan to sell the shares, you will of course need to start declaring the income on your tax return. 

Do you have all your paperwork in order? Why not share your experience in the comments section below?

Also read: Centrelink rules: what to do when the worst happens

Disclaimer: All content on YourLifeChoices website is of a general nature and has been prepared without taking into account your objectives, financial situation or needs. It has been prepared with due care but no guarantees are provided for the ongoing accuracy or relevance. Before making a decision based on this information, you should consider its appropriateness in regard to your own circumstances. You should seek professional advice from a financial planner, lawyer or tax agent in relation to any aspects that affect your financial and legal circumstances.