Valuation Issues

Overview

Gift and inheritance tax is charged on the value of the gift or inheritance received.

It is the price which those assets might reasonably be expected to obtain on a sale in the open market subject to such conditions as might be calculated to obtain for the seller the best price. The best price is generally understood to be the best price or market price in a fair and open competitive sale.

There are special rules applicable to particular asset classes or property types. The value is to be the market value as determined in the case of certain assets in accordance with special rules.

Open Market Value

Reference is made to a hypothetical seller and buyer.

The hypothetical seller is assumed to do what is necessary to obtain the highest price.  However, he is not required to take unreasonable steps or undue expenditure.  He may, however, be required to sell the property in particular lots.

The fact that there might exist a hypothetical buyer who is willing to pay more than the market may be a factor.  If, for example, land has a particular value for a particular adjoining owner, this may have an effect on the price, which needs to be considered.

Artificial restrictions on price are to be ignored.  Accordingly, the imposition of terms and conditions which could theoretically impede its value or for which are capable of being released are ignored.

In the case of assets which are coowned, the undivided share which passes is to be valued.

Quoted / Listed Companies

Special rules apply to shares in a public company quoted on a stock exchange.  In the case of quoted shares, there will generally be a readily ascertainable market by reference to the relevant stock exchange price.

A basis that is commonly used is that provided for in relation to capital gains tax which is lower of the last recorded price on the official list on the relevant date or, if more than one halfway between the loss and the highest.

Businesses Assets & Companies

Businesses and companies may be valued as a going concern or on breakup value.  The difference between the value of the business as a going concern and the value of its assets generally comprises goodwill.

Goodwill may also be attributable to unsaleable assets such as human capital, the value of registered intangibles and receivables.  The value of receivables may be less than their face value if there is a risk of non-collection.

The basis of the valuation of business assets in a company, partnership or sole trade will depend on whether and to what extent it is to continue to trade or whether its parts are to be broken up. Goodwill may not be saleable in many cases.

Generous business relief is available, which may reduce the actual value by 90%. See the separate section.

Aggregation of Holdings

Where the company is controlled by the beneficiary and connected parties, it is valued on the basis that the shareholder controls the company.  Accordingly, shareholdings held by connected relatives and companies directly or indirectly under his control are aggregated. This is similar to the definition of a close company for corporation tax purposes. See the separate section on this issue.

Connected persons are deemed one for this purpose. A person is deemed to have control of the company if he or connected parties are entitled to appoint the board of directors, are entitled to more than 50 percent of dividends on distribution or 50 percent of assets on a winding up or 50 per cent of the nominal interest in the company.

Shares controlled or indirectly controlled with connected parties are aggregated. Therefore, in the vast majority of private companies, the shares are valued as a proportionate part of the entire or a high proportion of the shareholding. In these cases, the discounts mentioned below will not be available.

A discount may be allowed where the shares have reduced rights by their terms. They may belong to a share class with limited rights.

The holdings of trustees of settlements of which the beneficiary is an actual or potential beneficiary are also aggregated with that of the beneficiary for this purpose.

Private Company Shares

In the case of shares, it is assumed that there is an available buyer who will have access to all information which he may reasonably require if he was undertaking a market purchase and commissioned a report for the purpose of considering the value of the assets.

A majority shareholding in a company is usually worth significantly more per share value than a minority holding, which has inherently less value.  The Revenue, in practice, allow discounts in respect of minority holdings and holdings less than 75 per cent.  The following are published guidelines.

• 75%+ Nil discount or perhaps 5% at most
• 50% + 1 10 – 15%
• 50% 20 – 30%
• 25% + 1 35 – 40%

Up to 25% with no dividend, guidance looks at discounted earnings with a discount range of 50% –70%.

Revenue Guidance

Trading and manufacturing companies are normally valued on the basis of a multiple of their maintainable after-tax profits. This multiple is known as the price-earnings ratio. The multiple used may vary depending on the particular industry in which the company is engaged.

The appropriate multiple is normally selected by reference to a quoted company/companies in the same industry. Financial information in respect of quoted companies is published regularly in the national newspapers. The results of these companies are analysed in relation to their trading performance and the prices at which their shares are sold are expressed as a multiple of their after-tax profits.

When a suitable quoted company has been identified, the normal practice is to use the multiple of after-tax profits appropriate to that quoted company, less a discount of 20% to compensate for the lack of access to the market, which a quote on the stock exchange provides, i.e. if the multiple of after-tax profits for the quoted company is 10, the appropriate multiple for an unquoted company would be 8, but
this may be further reduced if the unquoted company is a relatively small one.