Will capital gains tax apply to a family home held in a testamentary trust with a life interest?

 Author: NikkiATO(Community Moderator)Community Moderator

13 Apr 2026

Hi @OldGrizzler,

The capital gains tax (CGT) treatment in a testamentary trust depends on whether the main residence exemption can apply and how the property is dealt with under the trust. There are specific CGT rules that apply to deceased estates and trusts, and outcomes depend on the facts.

Where the original house isn’t sold until after your wife’s death, the key consideration is whether the main residence exemption continues after your death. If the property was your main residence just before you died and is occupied by your wife under a right of residence, special CGT rules may allow the exemption to continue for a period.

Whether any CGT is payable when selling the property will depend on when the sale occurs, whether the main residence exemption applies at that time, and how the trust operates under the terms of the will. In some circumstances, a full or partial exemption may apply.

If the downsized house is sold after your wife’s death, CGT will need to be considered by the trust. The capital gain is worked out from the time the trust acquired the replacement property to the time it’s sold. Whether any exemption applies depends on the specific conditions being met.

Because of this complexity, you may wish to seek advice from a registered tax agent experienced in estate planning and trust taxation, who can review your will and trust arrangements and apply the CGT rules to your circumstances. It’s also a good idea to check the rules that apply for the income year in which each event occurs.

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