Many business owners and advisers assume a valuation is only required when selling a company. HMRC expects robust valuations in far more situations, particularly where there may be a significant amount of tax at stake.
A professional share valuation for tax purposes helps ensure transactions are reported correctly to HMRC. If a professional valuation has been carried out this should avoid any possibility of HMRC charging penalties should the valuation be disputed in the future.
Below are five of the most common real-life situations where an HMRC valuation is required, with examples we regularly see in practice.
(Share valuation for tax and succession planning)
If you gift shares to family members, whether directly, through a trust, or as part of longer-term succession planning, HMRC treats the transfer as taking place at market value, even if no money changes hands.
This is one of the most common situations where a share valuation for tax is required.
A husband and wife own a trading company and want to gift shares to their adult children as part of inheritance tax planning. They assume the value is “what they paid for the shares originally”.
In reality:
A formal valuation ensures the transfer is correctly reported and avoids problems years later.
(HMRC valuation at date of death)
When a shareholder dies, their shares must be valued at the date of death for probate and inheritance tax purposes.
This type of HMRC valuation can be complex, particularly where:
An executor is dealing with an estate that includes shares in a family company. The business continues trading after death and profits increase significantly.
HMRC requires:
A robust valuation helps prevent delays to probate and reduces the risk of HMRC challenge.
(High-risk HMRC valuation area)
Valuations are frequently required when:
These share valuations for tax are often scrutinised closely because future growth is expected, but the current value may appear low.
A fast-growing company issues growth shares to key employees with a low initial value. Several years later, the company performs well.
If the original valuation was weak:
A carefully prepared valuation at the outset protects both the company and employees.There is a clearance procedure for EMI shares so HMRC will agree the valuation at the outset. No such clearance is available for growth shares.
(Business valuation for tax and planning)
You don’t need to be selling immediately to benefit from a valuation.
A business valuation for tax purposes is often used:
A business owner plans to exit in three to five years and assumes they qualify for BADR. A valuation highlights issues with shareholdings and trading status that could affect relief.
By identifying this early, changes can be made well before a sale, rather than discovering problems when it’s too late.
(Defendable HMRC valuation required)
Valuations are often required during:
In these cases, the valuation must be:
A company restructures its group and transfers shares between connected parties. HMRC later opens an enquiry into the transaction value.
A contemporaneous valuation:
Not all valuations are the same. Property company valuations will usually be on a different basis to trading companies.
The size of the shareholding may also affect the valuation, as different discounts will apply depending on the percentage shareholding in the company. For example, the discount for a 70% shareholding will be much less than a discount for a 10% shareholding. Also, it is not always correct to value the shareholding in isolation, especially in family companies.
At ETC Tax, we focus on producing valuations that are proportionate, clearly scoped and fit for purpose, rather than over-engineering straightforward cases. If you want to find out more about the services we offer, please do get in touch via mailto:enquiries@etctax.co.uk
