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When valuing a property investment company’s shares for IHT and CGT purposes, do you take account of (deduct) a corporation tax liability?

This Q&A is relevant to situations in which the shares in the company are unquoted.

The starting point for a valuation of unquoted shares is their open market value at the time of the transfer between a hypothetical willing buyer and willing seller. For the purposes of determining the price the shares would be expected to fetch on the open market, it is assumed that the prospective buyer has all the information they would require from a willing seller for a private sale at arm’s length. Although the wording is slightly different as between the inheritance tax (IHT) and capital gains tax (CGT) legislation, the interpretation of the legislation is the same.

The valuation must take into account a number of factors such as the size of the company and shareholding, and the company profits or assets. Valuing unquoted shares can be complex and different methods of valuation may be used (this work is usually undertaken by share valuation specialists or accountants).

One basis for valuation may be dividend yield. Alternatively, a multiple of profits method may be used along with the price-earnings ratio (which will in part be based on the accounts of the company and the post tax profit figure). If there is a high level of debt on the company’s balance sheet (or those of its peers), the value of the shares may be calculated by reference to earnings before interest, tax, depreciation and amortisation (EBITDA). For property companies with large asset portfolios, an asset based valuation may be used to reach a net asset value for the company (for which a deduction for the corporation tax liability may be permitted to reflect the latent chargeable gains on the properties).

A proposed liquidation may impact the value of the shares (as would a proposed sale of the company).

The valuation of unlisted shares and securities are dealt with by Shares and Assets Valuation (SAV) team at HMRC (although please note that some of the services offered by SAV are being withdrawn, under the heading ‘SAV announces withdrawal of post transaction valuation checks’. On submitting your proposed valuation to SAV, SAV will want to see the company’s accounts for the three years leading up to the valuation, as well as a detailed explanation/basis for the valuation that you have submitted.

If you would like a chat to discuss further, please feel free to contact me for a free 30-minute consultation.

Sophie Campbell

01637 800 306

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