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What’s it worth? Valuing shares in property investment companies

Alan Pink looks at the theory and the practice of share valuations in respect of investment companies – and how far apart these can be.

Valuing shares which are quoted on the stock exchange or alternative investment market is easy, as these shares are bought and sold and are quoted at a publicly available price. Private companies which aren’t so traded, however, present huge problems of valuation; which is a pity because the tax system very often requires us to value them for various purposes. 

Valuation difficulties
For example, if a gift is made of the shares in such a company, this is charged to capital gains tax (CGT) as if it had been a sale of the shares for their open market value. Except for gifts into trust, there is no CGT ‘holdover’ relief available, and so a real tax charge hangs on the value you put on the shares gifted. Where such shares were held on 31 March 1982 by the person disposing of them now, the value at that date will usually be the ‘base cost’ which you offset against the proceeds or deemed proceeds on disposal. 

For inheritance tax (IHT) purposes, the amount by which the value of your total estate has gone down is potentially or actually subject to IHT and, therefore, it is necessary to value your shareholding in the company both before and after any gift.

Given the difficulty of assessing the value of the shares in a private company, and the various occasions on which it’s necessary to arrive at a value to determine how much tax is payable, it’s also a pity that there are very few solid rules which can be applied and which will be applicable in all cases across the board. Instead, what we have from case law is a series of vague overall principles, which have to be applied to the – sometimes very different – facts of each case. 

One of these principles, which courts have decided should be applied when valuing shares for tax purposes, is that the purchaser is a hypothetical willing purchaser and that this purchaser would have found out all the facts that a prudent purchaser of this type would do in the circumstances. From the vendor’s point of view, one has to assume that a sale would actually take place (however unlikely this might actually be in practice), but we are not to assume that it is a forced sale. 

The bases of valuation of shares
In approaching the task of valuing a shareholding, you firstly have to decide which of the following three bases, all of them in theory potentially applicable, is the appropriate basis to use in the circumstances:
  • The assets basis
  • The earnings basis
  • The dividends basis
Under the assets basis, you look at what the company owns, and what those company assets are worth. This then follows through to the value of the shares in the company which owns those assets. 

The earnings basis takes a different view, although ultimately it is aiming at a similar result. Under this basis, you look at the amount of the company’s earnings year on year and assess the value of the shares from that. 

The dividends basis, rarely used in practice (perhaps too rarely; see below) simply looks at the individual shareholding you are valuing and considers what the income flow in the form of dividends is likely to be in the future, leading on from the valuation date. 

In the case of property investment companies, in my experience HMRC tends to lean heavily, or even exclusively, on the assets basis of valuation. On the face of it, this seems very reasonable because real property is the type of asset where you can comparatively easily arrive at a market value for those underlying assets. Simply ask an estate agent. 

Let’s consider a hypothetical case, involving a hypothetical HMRC valuation officer, to illustrate how a ‘typical’ share valuation might work:

Example: Assets basis of valuation

Robert dies on 1 April 2019. Amongst his assets is a 25% shareholding in Jenkins Properties Ltd, a property investment company. The other 75% of the shares are owned by his daughter, Susan, who owns 51%, and his sister, Mary, who owns the other 24%. The company’s properties are worth about £10 million, and there are no mortgages, nor any other significant assets or liabilities in the company’s balance sheet.

This information is provided by the accounts of the company, which are prepared to 31 March. Note that the 31 March 2019 accounts would not, of course, be available by 1 April and, therefore, the accounts one looks at are the most recent finalised accounts, being those to 31 March 2018. Where subsequent management accounts are prepared, one would obviously look at these, but in the case of Jenkins Properties Ltd, no management figures are prepared.

The HMRC valuer, looking at these facts, decides that Robert’s shareholding, on which his estate is chargeable to IHT, is worth £1.5 million, worked out as follows:


Value of whole company = value of properties

25% thereof

Less: 40% discount for minority

Therefore, value of shareholding






What is wrong with this picture? Well, where shall I begin?

Valuation issues
I may as well begin, in fact, with the whole basis of valuation being used by HMRC in this case. The assumption is that there is some kind of expectation that the shares might be realised as actual value in the foreseeable future. One of the first things one should always do, when valuing a company, is to look at the share rights, etc., in the Memorandum and Articles of Association. In the case of Jenkins Properties Ltd these are very simple, with all shares ranking equally for voting, dividends, and assets on winding up.

However, the factual assumption that a hypothetical purchaser of Robert’s shares on 1 April 2019 would have expected to realise the value for his investment in the foreseeable future may be very wide of the mark. Looking at the circumstances in more detail, you find that the other two shareholders are very firmly against any idea of winding up the company or selling it in the foreseeable future. Moreover, they, as the majority shareholders (owning 75%) have a policy of reinvesting the company’s rental income in buying more properties. So, the shares don’t even pay any dividends.

What this means in reality (as opposed to the kind of fantasy sometimes indulged in by HMRC’s shares and assets valuation division) is that a prudent prospective purchaser is looking at an asset of very questionable value. The fact that there are £10 million of assets behind the shareholding is, although not wholly irrelevant, much less relevant than the simple discounted asset value approach would imply. 

As an uninfluential minority, 25% of the company could well be argued, plausibly, to be better valued on the basis of the dividends to be expected. And a valuation on this basis, in our example, would be very small indeed. 

The practicalities
When arguing a valuation with HMRC, whether downwards (or, perhaps, if you are looking at 31 March 1982 value, upwards) it’s important to remember that the taxpayer and his adviser have a much greater grasp of the factual situation than HMRC can possibly have initially. So, look at all the circumstances and try testing the situation by asking the question: ‘what would I pay for this particular shareholding’?

This is a sample article from the monthly Property Tax Insider magazine. Go here to get your first free issue of Property Tax Insider.