IHT Share valuation of 50% of property co.

Arguing share valuation with HMRC for IHT purposes.

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I am arguing IHT valuation of 50% holding in a small private family property company. Articles say directors do not have to accept transfers of shares. We have agreed property values but arging discounts etc. HMRC only want to allow 25% of deferred tax provison, and a discount on capital value of only 10%.

Has any-one used an expert on these matters? Who would you recommend? 

 

Replies (12)

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By johngroganjga
06th Jul 2017 11:16

So your net assets valuation of the whole company includes a deduction for the contingent tax liability and HMRC want to add 75% of it back?

What is the 10% discount for?

What is the discount from the pro rata value for the 50% holding, or is that what the 10% is?

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Replying to johngroganjga:
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By partner55
06th Jul 2017 11:45

Yes, HMRC want to add back 75% of deferred tax from net asset value. They have then taken 50% of this revised net asset value, for the value of the 50% holding and then given a 10% deduction for 50%/private company shares.

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Replying to partner55:
By johngroganjga
06th Jul 2017 12:10

The 10% is fair enough, and I wouldn't argue.

If the starting point for the 75% add back is your calculation of the tax the company would pay it it sold all its properties at the agreed values then I would resist strongly. Ask them why any purchaser in his right mind would agree to take on the burden of paying tax on the growth in value of the company's properties that the vendor has enjoyed the entire benefit of.

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By Portia Nina Levin
06th Jul 2017 12:37

Having recently argued the toss with SAV, where they were arguing for a 10% discount on a 74% holding, I would be arguing for more than a 10% discount on a 50% holding. The ACCA factsheet on this suggests 15%-20%.

As I understand it, SAV policy is to never agree to more than 50% of the latent tax liability being deductible in calculating the base asset value, so you should be be pushing for a deferred tax add-back of no more than 50%, in my opinion.

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Teignmouth
By Paul Scholes
06th Jul 2017 13:26

Hi - I had a similar case a couple of years back. With regard to the contingent tax liability, like Portia, HMRC indicated that the 50% I had suggested was rarely agreed to and came back with 20%. I argued that there was a stronger than average chance that a property sale would take place in the near future and that, in fact, the family owners had been discussing such a sale. After a bit of toing & froing we ended up with 35%.

The share discount applied is a real minefield and really depends on each individual circumstance and the mix of shareholdings, eg, even if a 50% shareholding, would the mix of other shareholders give it an element of control?

It can also be the case that an IHT valuation will differ to a CGT valuation, with the former looking at the loss to the estate rather than the benefit to the purchaser. In my case, as well, the husband and wife's 25% individual holdings were joined for IHT and so, like yours, we had to discuss a discount applicable to a 50% shareholding.

Unlike Portia, the ACCA factsheet I referred to (number 167) indicated a 15%-25% discount for a 50% shareholding and, again after toing & froing, we agreed on 21%.

So all I can suggest is that you keep pushing and, hopefully, you can bridge both gaps a bit. If not, and it's really worth the extra delay and cost, I'd recommend Menzies, they helped me out on a couple of valuations a few years back and it's good to have someone that does this for a living.

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Replying to Paul Scholes:
By johngroganjga
06th Jul 2017 14:09

On the tax liability point, it's not (or at least it shouldn't be) about how soon the tax will be payable, but about who a vendor and purchaser dealing at arm's length would agree should bear the burden of it.

That's how it seems to me it is in the real world. I realise that the world of the SAV is in many ways not the real world, but the world of SAV's policies and practices.

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Replying to johngroganjga:
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By Portia Nina Levin
06th Jul 2017 14:16

IRL John, valuations get negotiated, with nobody giving a stuff what might happen in the real world. One side tries to get it as high as possible and one side tries to get it as low as possible. When the two sides thinks they've pushed the other as far as they can, they agree where they end up and move on with thir real lives.

Incidentally, Paul's and my own experience in relation to discounts are consistent.

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Replying to johngroganjga:
Teignmouth
By Paul Scholes
06th Jul 2017 16:46

Hi John - actually there is an element of logic in HMRC's approach to discounting the potential tax liability on the sale of the properties.

In my case, the same property had been owned and let out by the company for 60 years and so whilst there was a potential CT liability of say £500K associated with the capital gain in the property, if this was unlikely to crystalise for another 60 years, why shouldn't HMRC expect it to be discounted?

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Replying to Paul Scholes:
By johngroganjga
06th Jul 2017 17:39

Discounting for the time to payment is indeed logical - but in practice you will not know over what period to discount for.

Discounting for any other reason, is in my opinion not logical.

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Replying to johngroganjga:
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By Portia Nina Levin
06th Jul 2017 17:52

So, what you seem to be suggesting John is that the hypothetical purchaser and the hypothetical seller will, in the real world, split the difference in some arbitrary way, rather than some scientific way?

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Replying to Portia Nina Levin:
By johngroganjga
07th Jul 2017 09:09

No I am suggesting precisely the opposite - that the parties allocate the tax liability on the gains to the party who enjoys the benefit of the gains.

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Replying to johngroganjga:
Teignmouth
By Paul Scholes
06th Jul 2017 19:11

Fair enough John, I'm just talking from experience, not really the right room for an argument. Perhaps partner55 could use you as the expert, on a contingency basis of course

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