Writing for Taxation magazine’s Readers’ Forum, BKL tax consultant Terry Jordan responds to a reader’s query on valuing shares to calculate a discount for inheritance tax (IHT) purposes.
‘My client died in May and owned 20% of a family property company – investment mainly.
The company does not pay dividends. She was an employed and paid secretary:
- she was not a quasi partner;
- she did not have any specific rights built into her shareholding;
- she had no special agreement with other directors or shareholders in regard to decision making;
- she had no rights to influence dividend policy;
- she did not have a strategic holding which retained the balance of power, between other shareholders; and
- the company’s constitution does not provide for a valuation based pro rata on the value of the company.
If she wished to sell her shares, she had to offer them first to one of the other family shareholders.
What, in readers’ opinion, would be a fair discount on the share value in respect to her 20%. This would help in calculating her inheritance tax liability.’ Query 20,043 – Gamekeepers.
Terry Jordan’s reply: The holding will not benefit from BPR for IHT purposes.
‘Gamekeepers’ client died in May owning 20% of a family property company which, we are told, was mainly investment. Accordingly, the holding will not benefit from business property relief (BPR) for inheritance tax purposes.
There were apparently no special features about the holding. I assume that the deceased’s spouse or surviving civil partner, if any, did not own shares in the same company; otherwise, they would be related property within IHTA 1984, s 161 and would have to be aggregated with the deceased’s holding for valuation purposes.
Section 160 provides the general rule that the value for tax should be the price that the property would fetch in an open-market sale at the relevant time.
HMRC’s view is that prospective investors in property and investment companies have capital appreciation as their main goal and the valuation would normally proceed based on a discounted asset valuation.
As a general proposition, the smaller the percentage shareholding the bigger the discount. The significant valuation thresholds are 75% (ability to pass a special resolution; 50+% (control); and 25+% (ability to block a special resolution).
In the case of a property investment company, it is often necessary to uplift property values if they are on the balance sheet at historic cost. It may also be appropriate to add net of tax profit from the previous accounts date to the date of death.
Historically, HMRC would contend that perhaps only 10% to 20% of tax contingent on realising capital gains should be allowed in the calculation unless disposals of identified assets were imminent.
Following the decision in Goldstein v Levy Gee  EWHC 1574 it was thought that contingent tax should be split 50:50 between the notional buyer and the seller. Anecdotally I have heard that shares and assets valuation division may once gain seek to restrict the figure below 50%.
Reference could usefully be made to Mick Ruse’s article ‘Shares made simple’ (Taxation, 23 June 2011). Mick’s suggested discounts for a holding of 10.1% to 25% range from 70% to 85% depending upon the size of the company.’
The full article, published in Taxation issue 4867, is available on the Taxation website.
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