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Family company buying individual’s eis shares

What would be acceptable evidence of arms length valuation?

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An investor wishes to sell eis shares bought over five years ago but the eis company say there are no buyers, though they are raising further capital via a new fundraising round or ipo. 
 

the investor wants to sell his shares to his family Ltd company based on a letter from the eis firm confirming the valuation for the upcoming capital raise.  
 

would this be sufficient evidence for the valuation?

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By Duggimon
19th Oct 2021 11:08

Provided an otherwise unconnected investor buys shares at the value proposed by the business, I would consider that as good an indication of value as you can get.

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By sdodnib
19th Oct 2021 22:48

Duggimon wrote:

Provided an otherwise unconnected investor buys shares at the value proposed by the business, I would consider that as good an indication of value as you can get.

Thanks for the reply. The eis business is proposing the funding round but it’s yet to materialise and could take months. Meanwhile if the investor sells to his own company :
Could it fall under GAAR?
Is It possible to apply to HMRC for pre approval, as the cgt saving will be substantial?

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By Duggimon
20th Oct 2021 09:18

I don't think pre-approval would exist for this type of transaction. As to the application of the GAAR, I suppose you need to consider why he's selling his shares.

As for the valuation, if nobody has paid or is willing to pay that much for the shares then it's a bad valuation, so I'd be reluctant to use it until they do so, or until you can assess their justification for the valuation in detail and decide whether you agree.

Furthermore, the EIS issue from the company is more valuable to a taxpayer than the same shareholding sold on by your client due to the tax reliefs attached to the former but not the latter, so even if investors are found at that price, I would consider discounting your client's sale of shares to account for the tax relief that's no longer attached.

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By Matrix
20th Oct 2021 07:10

I don’t really see what this sale achieves.

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By Duggimon
20th Oct 2021 09:19

Given the response to my response, I suspect it achieves a favourable tax outcome for the investor, presumably by retrieving funds from the company that are not subject to income tax.

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By sdodnib
20th Oct 2021 09:20

Hypothetically speaking:
Individual bought eis shares five years ago at £100k
Current valuation £500k based on upcoming fund raise
Selling to his company allows the individual to extract £500k from the company (£400k in profits) without any tax liability due to no cgt on eis shares.
The company would pay ct if the shares were sold in future at a profit or claim a loss of sold at loss.

The biggest thing the sale achieves is cash flow for the individual’s personal use allowing them to take advantage of the cgt exemption despite difficulty finding buyers for the eis shares

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By Wilson Philips
20th Oct 2021 09:33

If he’s looking at extracting £500k it would be worth spending £1k or so to have a proper valuation carried out.

Is the family company a trading company? If so, have all potential consequences of holding the shares been considered?

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By Tax Dragon
04th Nov 2021 00:11

I reckon I could tell you the potential tax liability here without a valuation. And it's a six-figure sum. Personally, I would suggest the OP allocates that £1,000 to obtaining decent tax advice.

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By Wanderer
04th Nov 2021 06:13

sdodnib wrote:

The biggest thing the sale achieves is cash flow for the individual’s personal use.......

What do the other participants in the family company think of this?

Their company is exchanging cash of £500k for an investment, which, in view of the fact that their is no market for the EIS shares, & the necessity for the EIS company to raise further funds, may be worth very little.

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