Valuing the shares in a property investment company

Valuing the shares in a property investment...

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how do i go about valuing the shares in a property investment company?

The company owns several properties and is run by a husband and wife with 50:50 of the shares each.

They are considering gifting a small amount of the shares to their children (say 5 each) in order to start handing the company over to avoid inheritance tax

How do I go about valuing the shares?

Regards 

Jonathan

Replies (21)

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By johngroganjga
01st May 2015 12:42

the value of the company is:

The value of its properties (which is presumably a matter for a property valuation specialist rather than you) less the tax that would be paid by the company on a sale of the properties at that value, plus or minus the value of any other (presumably monetary) assets and liabilities.

That is where you get the value of the shares from.

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By jonibarnes
01st May 2015 12:46

Thanks for that John 

Thanks for that John 

 

I was working off net assets to get a estimate (the properties were revalued in 2013) so i shouldnt be that far off.

 

Interesting about taking the tax off - Thats just a straight 20% CT?

 

With them only transffering 5% do you think i can reduce the value for a minority shareholding?

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By johngroganjga
01st May 2015 12:54

No the tax won't be a straight 20%. It will be 20% of the contingent gains, after indexation allowance of course.

I would apply little or no minority discount for an investment company. If it were a trading company the discount for a 5% holding would be very substantial. But "control" is neither here nor there, it seems to me, when the company is just a store of value.

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By MBK
01st May 2015 12:55

Three points

Firstly, the tax to be calculated is the tax on a notional disposal of the investment properties. So you have to factor in indexation as you would in a real disposal.

Secondly, you wouldn't take the whole of the latent tax liability into account in an open market valuation. A vendor at arm's length would almost never agree to such a deduction as one needs to discount this liability for the fact that it is contingent only. In my experience it is normal to take into account around 70% of the liability.

Thirdly, the valuation of the shares to be transferred depends upon the size of the holding being transferred and, possibly, the dividend history / capacity of the company to pay dividends. It will be discounted from the pro rata value to one degree or another depending on these factors.

 

 

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By Anthony.Evans82
01st May 2015 12:56

I would....

Firstly, you need to obtain the value of the net assets as per the Balance Sheet.

This obviously requires you to have up to date property valuations (or at least an agreed set of valuations for use).

You also need to carry out a CT exercise based on the properties at cost, plus allowable expenditure (which can be indexed to uplift it to today's discounted value).  After you have an adjusted base cost for the assets, you can then work out the tax on chargeable gains and deduct this as a provision for tax on disposal and reduce the net asset value in the BS accordingly.

Does this help?

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By User deleted
01st May 2015 13:01

Minority interests ...

... are taken into account

Starting point is value of property. Then deduct a figure for tax, whatever that figure may be. Adjustment for dividends? Possibly, but it would be unusual. Discount for minority interest? Absolutely - for a 5% holding I'd be expecting a discount of at least 35 to 40%.

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By jonibarnes
01st May 2015 13:06

Thanks for all the input 

Thanks for all the input 

Anymore gratefully received!

Ive also found a bit of guidance on the web doesnt mention indexation though, everything else im following

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By MBK
01st May 2015 13:07

I think there may be a few of us posting at the same time here

@John: I don't agree that there would necessarily be little of no discount for a 5% minority. Whilst the company is a store of value a share value is essentially a function of the expected return on that shareholding.

If, for example, the company is up to its eyes in debt and there is no prospect of any return by way of dividend for some time then that makes the shares significantly less valuable than a company with the same net assets but which is cash rich and pays regular dividends.

But I agree that the discount for a minority shareholding in a property investment company will almost always be much lower than for a trading company.

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Replying to Cheshire:
By johngroganjga
01st May 2015 13:22

Liquidity

MBK wrote:

@John: I don't agree that there would necessarily be little of no discount for a 5% minority. Whilst the company is a store of value a share value is essentially a function of the expected return on that shareholding.

If, for example, the company is up to its eyes in debt and there is no prospect of any return by way of dividend for some time then that makes the shares significantly less valuable than a company with the same net assets but which is cash rich and pays regular dividends.

But I agree that the discount for a minority shareholding in a property investment company will almost always be much lower than for a trading company.

Your highlighted paragraph makes a good and interesting point. Yes I agree that all things (i.e. net assets) being equal a liquid company must have a higher value than an illiquid one. But while that should cause us to reflect on how we value the whole company (perhaps it's not just net assets pure and simple after all) I don't see how it affects what we say about minority discounts

 

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By johngroganjga
01st May 2015 13:12

Minority discount
No-one said they weren't taken into account BKD. I said that in these circumstances, in the real world, the discount would be £Nil or £Negligible, which is my considered view. For a trading company I would be saying at least 75%. Is your 35% to 40% good for a trading company as well?

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By jonibarnes
01st May 2015 13:35

This has been really helpful im fairly happy now

ER is available on the sale of the shares if they meet all conditions ?

Same couple have also been to a financial advisor who has advised them to put the properties into a pension.

with a value of just shy of a million wont this exceed the annual allowance? even if they have 3 years to carry forward.

also i may be daft but this isnt an area i tread in a lot, what are the benefits? they seemed to be under the impression it would reduce their inheritance tax bill?

 

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By Anthony.Evans82
01st May 2015 13:44

No

ER will not be available as it is an investment business.  One of the qualification criteria for ER is that it is a trading company.  So no ER on the sale of those shares.

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By johngroganjga
01st May 2015 13:47

ER?

Yes ER is available if the conditions are met, but of course the first and most important condition is not met because, from what you say, it is 100% a non trading company.

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By jonibarnes
01st May 2015 13:47

of course
thanks Anthony

of course

thanks Anthony

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By Anthony.Evans82
01st May 2015 14:03

and that damn 20% rule

As John rightly states, from what you have said, the company sounds like a 100% investment company, but remember even if it is not, there is the 20% ruling which means if more than 20% of the business income is derived from investment activities then it would preclude it from being eligible also.

Sorry, I should have checked first with you whether or not there were trading activities being continued within the business.

A

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By User deleted
01st May 2015 14:13

In the real world ...

... I have seen discounts in the range that I suggested for a property investment company. Certainly never nil nor negligible. For a trading company, it depends on the valuation method(s) used, but I'd generally be going for a higher discount (not significantly so if asset based, which would be the exception) - I've seen discounts of 90% for 5% holdings

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By jonibarnes
01st May 2015 14:34

Cheers Anthony

 

All the income is from investment activities

 

My heads gone again the contingent tax is the uplift in value of the assets @ 20%

Then multiply this between a range of 10% - 30% (dependant on circumstances) which HMRC freequently find appropraite

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By geoffwolf
01st May 2015 14:51

Pension?

The size of individual pension contributions is now limited. However much more needs to be known about income of husband and wife. The £1M limit is per person. 

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By jonibarnes
01st May 2015 15:57

just done a bit of further reading and it seems to suggest that the asset based valuation shouldnt be used to calculate the valuation for a minority interest- however its a friday and i could be making no sense

 

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By Justin Bryant
01st May 2015 16:57

BKD is right

In the real world (i.e. under s272 TCGA 1992), a 10% shareholding is not worth 20% of a 51% shareholding or 10% of a 100% shareholding etc. of a property investment company for fairly obvious reasons re control etc. i.e. it is worth much less than the equivalent pro-rated NBV of the company as a whole. I have seen many situations where the HMRC agreed value for minority interests in an asset rich property investment company is a big discount to the pro rated NBV value of the company because in the real world you would not pay anything more than such a discounted amount for a minority interest (unless you were a fool). I am very happy to be proved wrong if someone can provide a legal case that says otherwise.

http://webarchive.nationalarchives.gov.uk/20090302150838/http:/hmrc.gov....
http://webarchive.nationalarchives.gov.uk/20090302150838/http://hmrc.gov...

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By Montrose
01st May 2015 17:06

Some extra points

CGT and IHT valuations are not the same. For CGT you look at what is the value of the  shares gifted-here a small minority holding with a significant discount  to pro rata net asset value [perhaps 80%]f or a minority holding.-assuming there is not a pattern of significant dividend payments in which case a yield basis can give a larger figure.

For IHT you look at the loss to the estate of the donor- H+W's shareholdings are aggregated for valuation purposes. In practice for an aggregate gift of under 10%-leaving H+W's holding at over 90% you are going to be near to net asset value.

It is only for transfers at death that the same value applies for CGT and IHT.

So how is net asset value affected by CT on unrealised gains ? SVD will seek heavily to discount the contingent liabiltiy unless you can show that property sales are imminent..

You may also enjoy a modest discount to net asset value because to realise it some costs would be incurred on the sale and dissolution

 

 

 

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