Company valuation for IHT purposes

Company valuation for IHT purposes

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I'm in the process of completing an IHT205 form for my Dad's estate and I have to put a value on the 1 share (50%) of the company that I own the other share of. My question is how do I value the company?

I realise I should get professional advice but the amounts are small and shouldn't trigger IHT threshold and anyway should qualify for 100% BPR exemption as a family business. I've also produced my own accounts the last 2 financial years so don't have a company accountant to assist.

I would like to apply a proper method in case the tax man queries my figures. Basically what I've done is use the "Retained profit" figure from my last published accounts (April 2013) then estimated the figure for April 2014 based on my sales/purchase ledgers for that year and then extrapolated forward to the date of Dad's death. This figure is £71k.

I've summarised turnover, profit/loss, balance sheet, retained profit figures for the last 6 years in a spreadsheet and intend to attach that with the IHT205.

Is that good enough or are there other factors or intangibles involved I should take into account for company valuation purposes? Grateful for any opinions!

Replies (7)

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By johngroganjga
01st Aug 2014 18:10

I imagine that the issued share capital of your company is a negligible figure, so this point probably makes no material difference, but if you think it through, valuing a company on the basis of its retained profits is not particularly logical is it. What if the issued share capital was £1 billion?

With that proviso, what you have produced is a net assets valuation, which is a reasonable starting point. In the circumstances that whatever the value is it is reduced to £Nil for IHT purposes by BPR you clearly don't want to over-elaborate. I could go on to explain how you might approach an earnings valuation, which might produce a larger figure, but if you are sure that BPR is available I would simply complete the IHT return on the basis that the value of the share was 50% of the company's net assets (stating that that is what you have done) and attach the accounts summaries etc. that you refer to, so that HMRC can take issue with the valuation in the unlikely event that there is any point in them doing so.

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Replying to Matrix:
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By YoungBob
01st Aug 2014 19:13

Many thanks, John. The issued share capital is £2 so I'll use "Net asset value" instead of "Retained profits" and add the note and hope they'll accept that.

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David Winch
By David Winch
01st Aug 2014 19:08

Thinking aloud . . .

Might there be a tax disadvantage (arising on a subsequent sale) in having the share valuation too low?

David

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Replying to johnhemming:
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By YoungBob
01st Aug 2014 19:26

re: Thinking aloud...

davidwinch wrote:

Might there be a tax disadvantage (arising on a subsequent sale) in having the share valuation too low?

David

Interesting point - CGT I presume? I don't see the company value increasing significantly as it's been pretty stable for a while. I intend to withdraw dividends once the share is transferred but I guess that only affects the net asset value not the sale price as that probably depends more on the earnings value as John has mentioned.

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By johngroganjga
02nd Aug 2014 07:26

David makes a good point. My response focused on the immediate IHT return issue, but David is right that you should not lose sight if the other side of the coin that whatever value is agreed will be the CGT base cost for that share on a future disposal, or winding up. So the lower the value you agree now the higher will be the future CGT liability.

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David Winch
By David Winch
02nd Aug 2014 09:35

Value today

There are a number of alternative bases on which company shares may be valued.  It is not really my field (I specialise crime & proceeds of crime) but what I am suggesting is not that the value of the shares in the company will increase, but that the current value of the shares may be higher than is indicated by the net assets basis.

An alternative basis would be to value the shares on a multiple of the profit.  But that begs questions about how one calculates the profit of the company for this purpose and what multiple should be used and whether the value should be discounted for a 50% shareholding.

As I say, not really my field . . .

David

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Teignmouth
By Paul Scholes
02nd Aug 2014 12:20

Some reference material

Hi

Might be worth a look at one or two guides, the best I've found in one place are the ACCA fact sheets issued a few years back, here's the one on trading company valuations.  Also worth a look at HMRC's guides, here's an example.

In general, unless it was a majority holding or company was loss making, about to be wound up or its business was holding assets, I'd steer clear of net asset valuations, in favour of profit based, but you need, in particular, to bear in mind reasonable "management charges", which will usually reduce profits (these are dealt with in the ACCA fact sheet).  Even at 50% there will also be the need to discount the valuation to reflect no control.

The main point in going into this much detail is that, as hinted at above, you may not be worried about over valuing, as it's covered by BPR, but HMRC could well challenge an over valuation.

 

 

 

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