Inheriting shares through a trust: why it can trigger unexpected tax consequences

One of the biggest pitfalls is the little-known CGT event E5, and the impact can be significant. This can lead to outcomes very different from what families intend, and potentially costly surprises for beneficiaries.

Common scenarios and CGT impacts

Several common situations illustrate how trust structures can complicate what should be a straightforward wealth transfer:

· Scenario 1: Beneficiary inherits shares via a discretionary trust

The beneficiary later receives the shares in their own name. This transfer can trigger CGT, even though the shares were simply being passed on.

· Scenario 2: A life interest arrangement comes to an end and a trust vests in favour of the capital beneficiaries

The capital beneficiary merely becoming entitled to a trust asset can trigger a CGT event in the trust.

· Scenario 3: Beneficiary comes of age

A beneficiary reaching a certain age and becoming entitled to trust assets can also trigger a CGT event.

The culprit – CGT event E5

At the heart of the issue is CGT event E5. This occurs when a beneficiary becomes absolutely entitled to a trust asset, such as listed shares, that has been purchased by the trustee of the trust.

Importantly, although the CGT event happens in the trust, it is the beneficiary that is then assessed on the gain and may be responsible for the tax on the CGT event.

For families with significant share portfolios, this technicality means that tax is to be paid upon acquiring an asset, rather than when a sale occurs.

Direct inheritance vs trust inheritance

By contrast, direct inheritance from an estate often attracts CGT rollover relief, allowing the beneficiary to inherit the shares without an immediate CGT liability. The difference between direct transfer and transfer via a trust can therefore be substantial.

For wealthier families with significant listed investments, these nuances are critical when considering estate planning. What looks like a neat solution holding assets in trust, can end up crystallising unnecessary tax events.Cost base and record-keeping

CGT event E5 does not apply to the transfer of trust assets that were originally held by the testator. Cost base rules around this, and whether shares are pre-CGT or post-CGT matters enormously.

This is where meticulous record-keeping becomes critical. Investors who don’t maintain accurate cost bases risk leaving their beneficiaries with confusion, disputes and untimely tax bills.

The takeaway for investors

For those managing significant family wealth, the message is simple: trusts are not a tax-free vehicle for passing on shares. Unless carefully planned, they can trigger CGT liabilities that shrink what your beneficiaries receive.

The smarter approach is to review your structures now – understand when CGT event E5 may apply, ensure records are watertight, and consider whether direct inheritance of shares is more efficient.

A tax professional can help beneficiaries understand their obligations, optimise their tax position, and avoid costly errors. With the right planning, you can protect your legacy instead of handing more of it to the ATO.

Chris Holloway is the senior manager, taxation services at Equity Trustees, the brand name for EQT.