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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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.
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.
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.
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?
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%.
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.
Liquidity
@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
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?
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.
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.
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
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
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.
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...
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