Capital taxes
CGT aggregation
There are aggregation rules in place for CGT valuations which can have a major effect on value. These rules require the aggregation of all connected persons disposals made within a rolling six-year period, which can mean that small minority shareholdings must be valued as part of a much larger shareholding.
IHT aggregation
There are aggregation rules in place for IHT valuations which can have a major effect on value. These rules require the aggregation of all the shares to which the transferor and their spouse are beneficially entitled.
Loss to the estate
IHT on lifetime transfers is quantified by reference to the loss to the transferor’s estate. Valuations are required for the aggregate shareholding held both prior to and after the transfer. This can lead to bigger than expected liabilities – if, for example, the aggregate shareholding held prior to the transfer conferred control and the aggregate shareholding held after the transfer did not.
Information Standards
There are complex rules governing the availability of information to the valuation of minority shareholdings. It is important to get them right because the dataset will drive the valuation and therefore the amount of tax payable. The Information Standards are explored in case law and depend on several factors including, but not limited to, number of votes attaching to each block of shares, the likely value of each block and the quality of the published information.
Discounts
The term ‘discount’ is commonly used to describe two relationships in the context of private company share valuation and it is crucial to understand which of the two is in point:
- The reduction made to quoted and other comparator multiples used to arrive at a value: comparator multiples are often adjusted to reflect differences between comparator companies and the subject company including, amongst many others, size, diversity, number of votes and marketability; or
- The relationship between the value per share of a private company and the value per share of a shareholding in that company: a discount is often reflected in the valuation of minority shareholdings to reflect a lack of marketability and control. Estimating an appropriate discount is a complex matter. There is a wide body of case law exploring the application of such discounts and several empirical and mathematical approaches have been developed to quantify them. Many other fact pattern specific factors will also affect the quantum of any discount.
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