Private company share valuations and the taxman

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Published: 20 Feb 2015

Capital taxes liability on private company shares arising in a person’s estate

Although there are a number of tax reliefs on the valuation of private company shares, the tax angle needs to be considered for every transaction or valuation.

This article relates solely to the capital taxes liability on private company shares arising in a person’s estate, based on UK tax legislation at 19 February 2015.

First of all, any uplift in the valuation of private company shares at the date of death is free of capital gains tax. So there is no capital gains tax payable on death. But that is not quite the end of the story. For instance, if the spouse or children are given private company shares under the terms of the will and it is possible that those shares may be sold so many years later to a third party, a taxable gain may arise. In order to reduce the taxable gain a valuation of the shares in the estate of the deceased spouse would be necessary. So it is always better to carry out that valuation at the date of death, to be produced when and if required by HMRC to support a reduced taxable gain. When submitting the inheritance tax return, ensure that you obtain the agreement of HMRC that this valuation can be used in any subsequent computation to reduce the capital gains tax payable by the spouse or children.

If the private company shares in the estate relate to a trading company, there is no inheritance tax payable, as the shares qualify for Business Property Relief (BPR), provided they were held for at least two years prior to the date of death. This period includes the period of ownership by a deceased spouse or civil partner.

If the private company is not a trading company (e.g. an investment company or a property investment company), it does not qualify for BPR. In that case the shares form part of the estate for tax purposes and a valuation is required for the inheritance tax return.

When valuing private company shares HMRC will accept a discount on the valuation for interests less than 100%. HMRC have unpublished guidelines for discounts on share interests less than 100% , which range between 25% to 75%. Unlike commercial transactions, it does not take into account the intentions of either party that may affect the share price or the resultant shareholding of the buyer. For instance, if the buyer becomes a 100% shareholder as a result of this transaction that would give rise to a “control premium” to be added to the value of the shares. For inheritance tax purposes, this is ignored in relation to a gift under the terms of a will.

If you wish to understand these implications in greater detail you are invited to have a free consultation with David Cane of Sundial Tax & Finance Ltd (Contact Details: (T) 0845 177 0036; (M) 07749 080 806; (E) [email protected]