I quite often joke that if three advisers were asked to value company shares, you would get at least five different answers. I do have better jokes, this is just one of my tax ones 😊, but the serious point to highlight is just how subjective tax valuations are.
I’ve spent quite some time debating various tax valuations with other Sagars team members recently and clients are often surprised that there isn’t a simple answer for how much tax they might have to pay on transactions involving private company shares. Common examples are gifting shares into trust, making a gift to family members and rewarding employees with shares in the business they work in.
Types of valuation
The type of company involved in the transaction (trading company, investment company or a mix) may give an indication of whether valuations should be based on a multiple of earnings, perhaps a dividend stream computation or an asset valuation. Sometimes it’s advisable to look at more than one valuation basis, and to compare them to form a view.
Areas of contention
To demonstrate the various issues of contention, I’ll focus on a property investment company illustration, as they are often something we do have to value because any sort of share transaction is likely to have tax implications.
Initially, there is the property valuation aspect to consider; are the properties on the balance sheet at market value? In theory, they perhaps should be, but if that is a director’s valuation is that going to be sufficient? Should a professional valuer be engaged? Would it be appropriate to include any sort of discount to market value to reflect the sale of the entire portfolio which would essentially be the case if you were selling the company?
Deferred tax provision
Generally, if the properties have increased in value since acquisition, accounting rules dictate that a provision be made for the potential corporation tax payable on a sale. This is usually based on the estimated total tax due in that scenario. HMRC will often challenge a deduction for this corporation tax provision, contending that if there is no intention to sell the properties then it is too remote, even if accounting standards dictate its inclusion. This may become a point of negotiation with HMRC, and some sort of allocation agreed.
Let’s say that we get to a point where the overall company valuation can be put forward. If the transaction relates to a specific level of shareholding, another level of subjectivity is required around the appropriate discount to apply. For example, if you hold 75% or more of a company, you have control over pretty much everything. If you have 51%, then you can pass ordinary resolutions so that is still a controlling share. If you hold more than 25%, you can block a special resolution, but once you hold 25% or less, there is very little power in your shareholding in general. So, size really does matter and the lower your % share, the bigger the discount should be. However, there is not a standard discount to apply for each shareholding, so this all needs considering as part of the valuation.
Types of tax
Another important point to note is that tax valuations vary according to which tax the valuation is for. In the case of Capital Gains Tax (CGT), you normally value the shares that are being gifted/transferred as if there is a transaction between a willing seller and a willing buyer of that shareholding (although beware that there are rules that can kick in if you decide to break a gift down into smaller parts to mitigate tax.) Whilst for Inheritance Tax (IHT), you normally look at the ‘diminution in the value of the estate’ which means you value what you have at the start, what you have after the gift, and the IHT valuation is the difference.
That may sound bizarre but think of it like this:
Imagine you own 51% of a property investment company worth £1m and you decide to give your children just 2% of it. For CGT purposes, you have given them a 2% shareholding which probably has quite a small value, substantially less than the £20k it would be pro-rata. However, what you have successfully done is go from a controlling shareholding to a minority shareholding, and that minority shareholding will inevitably attract a bigger discount. Say your 51% is worth £400k (just over a 20% discount) but the 49% shareholding could only be worth £300k (closer to 40% discount). This means that your transfer value for IHT purposes on those numbers would be £100k, which is substantially more than the 2% standalone value. (I am just illustrating the point, not saying these are necessarily the discounts to apply – advisor’s caveat 😊).
How we can help you
As I said at the start, this only recently came to mind because of specific valuations I was discussing with colleagues, during which I realised just how subjective all of this is, and frankly how inconsistent HMRC are in their dealings with us as tax agents, because they tend to negotiate on a case-by-case basis which means it’s really difficult to establish where the boundaries lie.
What I would say is that if you have any plans to make gifts of shares or do anything that is likely to trigger a tax charge on private company shares, make sure you talk to us first, because it’s neither quick nor easy to work out what tax you might have to pay. Whilst we cannot give you an absolute, set-in-stone figure, we can use our years of experience to guide you as to the likely outcomes, help you to understand where those subjective areas are, and appropriately report and disclose it all to HMRC. And if they do choose to argue, we are there to defend it all too. Whilst this isn’t a precise science, we are well versed in the dark art of tax valuations.