Valuation Issues
Revenue Manual Share Valuation
21.1 Introduction
As part of its compliance function, Revenue values unquoted shares which are held in private or public companies which are not listed /quoted on a Stock Exchange.
21.2 Aims of Valuation
• To ensure that valuations submitted in respect of unquoted shares reflect the open market values.
• To deter evasion and avoidance by detecting under-valuations and taking appropriate action.
21.3 Valuation of Shares
Valuation is not an exact science. The value of a shareholding depends on many factors – the nature/size of the shareholding passing, profitability of the business and its future prospects in the marketplace at the time of the transaction.
When valuing shares in unquoted companies for tax purposes, the shares passing must be valued on the basis of a hypothetical sale in a hypothetical open market between a hypothetical willing vendor and a hypothetical willing purchaser.
Depending on the nature of the company’s business, different valuation methodologies may be employed.
21.4 Valuation Based on Earnings
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.
Example
Company’s after-tax profits €250,000
Price Earnings Ratio (say) 8
Value of Company €2,000,000
This is known as the Earnings method of valuation and most companies are valued on this basis.
If a company has retained profits or assets of any sort not immediately required for the purpose of its trade, the value of all such assets would normally be added to the company’s earnings value.
21.5 Valuation Based on Assets
Investment holding or property holding companies are normally valued on the basis of their net assets value. The values shown on the Balance Sheet for property or investments may not normally represent their true value. It is generally necessary therefore to obtain up-to-date values as at valuation date for these assets and substitute market value for book value on the Balance Sheet when carrying out a valuation.
21.6 Valuations Based on Turnover Fees or Commissions
Companies which own or operate Licensed Premises or Restaurants or whose business is in the services sector, such as Insurance Brokers, Quantity Surveyors, Architectural Practices, Consulting Engineers, Legal etc. are normally valued on the basis of a multiple of their turnover, fees or commissions.
21.7 Control of a Company
Where a company is a “company controlled by the donee or successor”, section 27 of the Capital Acquisitions Tax Consolidation Act 2003 provides that the shares must be valued on the basis that the owner is deemed to have control of the company.
The combined shareholdings of the donee or successor and his or her relatives (and of the trustees of any settlement whose objects include the donee or successor or relatives of the donee or successor) are taken into account both for the purpose of ascertaining whether or not the company is controlled and for the purpose of measuring the extent of the control.
21.8 Definition of Control
Control under section 27 is defined and covers voting control (direct or indirect). Control is recognised as:
• the capacity to exercise the power of a board of directors,
• the right to receive more than half of total dividends,
• an interest in the shares of the company representing half or more of the total nominal value of the shares of the company,
• the powers of a board of directors of the company,
• powers of a governing director of the company,
• the power to nominate a majority of the directors of the company or a governing director thereof,
• the power to veto the appointment of a director of the company or powers of a like nature.
21.9 Explanatory Note on Relatives
“Relative of the donee or successor” as defined by section 2(4) of the Capital Acquisitions Tax Consolidation Act 2003 includes—
a) the spouse;
b) the mother, father, children, uncles and aunts;
c) brothers, sisters, nephews, nieces, grandchildren, great-grandchildren, first cousins and their children;
d) spouses of those mentioned at (b) and (c);
e) grandparents.
21.10 Effects of Control
Under these provisions, shares in companies that are owned by an individual or by relatives of an individual, are to be valued as a proportionate part of the entire shareholding in the company held by that individual and relatives of that individual.
21.11 Different Classes of Shares
Section 27 also provides that where different classes of shares exist, each class of share must be valued in the light of the advantages and disadvantages that attach to them.
Valuation examples of controlled companies illustrating the effect where there are more than one class of shares with different rights.
Controlled Company Issued Share Capital 100 Ordinary €1.00 shares all shares
pari passu.
Company worth €20,000
Value of 1 share €20,000 x 1 100
= €200 per share
Controlled Company Issued Share Capital 80 Ordinary €1.00 shares and 20 A
Ordinary Voting Shares. Other than voting rights, all shares pari passu. (Voting shares are allocated a premium value equivalent to 15% of the value of the company to reflect the power which attaches to them.)
Company worth €20,000 A shares voting premium €3,000
Balance for distribution between voting and non-voting shares €17,000
Valuation of Ordinary Shares
€17,000 x 80 =€13,600 = €170 per Ordinary Share
100 80
Valuation of A Ordinary Shares
€17,000 x 20 + Voting Premium €3,000 100
Value of one A Ordinary Voting Shares
€170 x 20 + Voting Premium €3,000 = €170 + €150 = €320 per share 20
Difference in value therefore: Ordinary Non-Voting Shares €170 per share
Voting A Ordinary Shares €320 per share Value of Voting Rights therefore = €150 per share.
21.12 Size of Shareholding
The size of the shareholding passing reflects the amount of control that a shareholder can exercise on the running of a company and the value of a particular shareholding is normally discounted to reflect the advantages/disadvantages attaching to same.
A 75% – 100% shareholder has full control over all matters affecting the company, including the power to wind it up.
A 51% – 74% shareholder has the power (control) to do all things except wind the company up.
A 50% shareholder needs the support of another shareholder to pass an ordinary resolution.
21.13 Majority Shareholding/Influential Minority Shareholding
21.13.1 Holdings of 50% and above
Value by reference to the value of the whole company less a suitable discount, e.g.
75%+ Nil discount or perhaps 5% at most 50% + 1 10 – 15%
50% 20 – 30%
25% + 1 35 – 40%
21.13.2 Minority Shareholding
Up to 25% – value by reference to dividends if a realistic level of dividend is being paid. If no dividend, look at discounted earnings with a discount range of 50% – 70%, as these are influential minority holdings.
21.14 Stages in Valuation
1. Calculate the value of the entire company.
2. Value the shareholding passing.
3. Discount gross value to reflect size of shareholding passing, taking account of the deemed control provisions of Section 27 of the Capital Acquisitions Tax Consolidation Act 2003.
CAT Act
PART 4
Value of Property for Tax
26
Market value of property.
[CATA 1976 s15]
(1)In subsection (6), “unquoted shares or securities” means shares or securities which are not dealt in on a stock exchange.
(2)Subject to this Act, the market value of any property for the purposes of this Act is estimated to be the price which, in the opinion of the Commissioners, such property would fetch if sold in the open market on the date on which the property is to be valued in such manner and subject to such conditions as might reasonably be calculated to obtain for the vendor the best price for the property.
(3)In estimating the market value of any property, the Commissioners shall not make any reduction in the estimate on account of the estimate being made on the assumption that the whole property is to be placed on the market at one and the same time.
(4)The market value of any property shall be ascertained by the Commissioners in such manner and by such means as they think fit, and they may authorise a person to inspect any property and report to them the value of such property for the purposes of this Act, and the person having the custody or possession of that property shall permit the person so authorised to inspect it at such reasonable times as the Commissioners consider necessary.
(5)Where the Commissioners require a valuation to be made by a person named by them, the costs of such valuation shall be defrayed by the Commissioners.
(6)Subject to this Act, in estimating the price which unquoted shares or securities might be expected to fetch if sold in the open market, it shall be assumed that in that market there is available to any prospective purchaser of the shares or securities all the information which a prudent prospective purchaser might reasonably require if that prudent prospective purchaser were proposing to purchase them from a willing vendor by private treaty and at arm’s length.
27
Market value of certain shares in private companies.
[CATA 1976 s16]
(1)In this section—
“group of shares”, in relation to a private company, means the aggregate of the shares in the company of—
(a)the donee or successor,
(b)the relatives, civil partner, children, or children of the children of the civil partner, of the donee or successor,
(c)the civil partners of persons who are by virtue of section 2(4)(b) or (c) relatives of the donee or successor,
(d)the civil partners of any children or any children of the children of the civil partner of the donee or successor,
(e)nominees of the donee or successor,
(f)nominees of—
(i)relatives of the donee or successor,
(ii)the civil partner of the donee or successor,
(iii)children or children of the children of the civil partner of the donee or successor,
(iv)the civil partners of persons who are by virtue of section 2(4)(b) or (c) relatives of the donee or successor, or
(v)the civil partners of any children or any children of the children of the civil partner of the donee or successor,
and
(g)the trustees of a settlement whose objects include—
(i)the donee or successor,
(ii)relatives of the donee or successor,
(iii)the civil partner of the donee or successor,
(iv)the children or children of the children of the civil partner of the donee or successor,
(v)the civil partners of persons who are by virtue of section 2(4)(b) or (c) relatives of the donee or successor, or
(vi)the civil partners of any children or any children of the children of the civil partner of the donee or successor;
“nominee” includes a person who may be required to exercise that person’s voting power on the directions of, or who holds shares directly or indirectly on behalf of, another person;
“private company” means a body corporate (wherever incorporated) which—
(a)is under the control of not more than 5 persons, and
(b)is not a company which would fall within section 431 of the Taxes Consolidation Act 1997 if the words “private company” were substituted for the words “close company” in subsection (3) of that section, and if the words “are beneficially held by a company which is not a private company” were substituted for the words of paragraph (a) of subsection (6) of that section;
“share”, in relation to a private company and in addition to the interpretation of “share” in section 2(1), includes every debenture, or loan stock, issued otherwise than as part of a transaction which is wholly and exclusively a bona fide commercial transaction.
(2)(a)The market value of each share in a private company which (after the taking of the gift or of the inheritance) is, on the date of the gift or on the date of the inheritance, a company controlled by the donee or successor, shall be ascertained by the Commissioners, for the purposes of tax, as if, on the date on which the market value is to be ascertained, it formed an apportioned part of the market value of a group of shares in that company, such apportionment, as between shares of a particular class, to be by reference to nominal amount, and, as between different classes of shares, to have due regard to the rights attaching to each of the different classes.
(b)For the purpose of ascertaining the market value of a share in a private company in the manner described in paragraph (a), the benefit to any private company (in this paragraph referred to as “the first-mentioned company”) by virtue of its ownership of an interest in shares in another private company (in this paragraph referred to as “the second-mentioned company”) is, where each of the companies so connected is a company which (after the taking of the gift or of the inheritance) is, on the date of the gift or on the date of the inheritance, a company controlled by the donee or successor, deemed to be—
(i)such benefit as would be appropriate to the ownership of that interest if the second-mentioned company were under the control of the first-mentioned company in the same manner as (on the date on which the market value is to be ascertained) the second-mentioned company is under the control of any of the following:
(I)the first-mentioned company;
(II)the donee or successor;
(III)the—
(A)relatives, civil partner, children or children of the children of the civil partner,
(B)civil partners of persons who are by virtue of section 2(4)(b) or (c) relatives, or
(C)civil partners of the children or the children of the children of the civil partner,
of the donee or successor;
(IV)nominees of the donee or successor;
(V)any nominees of—
(A)the relatives, the civil partner, children or children of the children of the civil partner,
(B)the civil partners of persons who are by virtue of section 2(4)(b) or (c) relatives, or
(C)the civil partners of the children or the children of the children of the civil partner,
of the donee or successor;
(VI)the trustees of a settlement whose objects include—
(A)the donee or successor, or
(B)any—
(ai)relatives, civil partner, children or children of the children of the civil partner,
(aii)civil partners of persons who are by virtue of section 2(4)(b) or (c) relatives, or
(aiii)civil partners of children or children of the children of the civil partner,
of the donee or successor,
or
(ii)the actual benefit appropriate to the ownership of that interest,
whichever is the greater.
(3)In this section, a reference to a company controlled by the donee or successor is a reference to a company that is under the control of any one or more of the following:
(a)the donee or successor;
(b)the—
(i)relatives, civil partner, children or children of the children of the civil partner,
(ii)civil partners of persons who are by virtue of section 2(4)(b) or (c) relatives, or
(iii)civil partners of the children or the children of the children of the civil partner,
of the donee or successor;
(c)nominees of the donee or successor;
(d)nominees of—
(i)the relatives, the civil partner, children or children of the children of the civil partner,
(ii)the civil partners of persons who are by virtue of section 2(4)(b) or (c) relatives, or
(iii)the civil partners of the children or the children of the children of the civil partner,
of the donee or successor;
(e)the trustees of a settlement whose objects include—
(i)the donee or successor, or
(ii)the—
(I)relatives, the civil partner, children or children of the children of the civil partner,
(II)civil partners of persons who are by virtue of section 2(4)(b) or (c) relatives, or
(III)civil partners of the children or the children of the children of the civil partner,
of the donee or successor,
and for the purposes of this section, a company which is so controlled by the donee or successor shall be regarded as being itself a relative of the donee or successor.
(4)For the purposes of this section—
(a)a company is deemed to be under the control of not more than 5 persons if any 5 or fewer persons together exercise, or are able to exercise, or are entitled to acquire control, whether direct or indirect, of the company and for this purpose—
(i)persons who are—
(I)relatives of any other person,
(II)the civil partner of any other person,
(III)children or children of the children of the civil partner of any other person,
(IV)the civil partners of persons who are by virtue of section 2(4)(b) or (c) relatives of any other person, or
(V)the civil partners of the children or the children of the children of the civil partner of any other person,
together with that other person,
(ii)persons who are nominees of any other person together with that other person,
(iii)persons in partnership, and
(iv)persons interested in any shares or obligations of the company which are subject to any trust or are part of the estate of a deceased person,
shall respectively be treated as a single person, and
(b)a person is deemed to have control of a company at any time if—
(i)that person then had control of the powers of voting on all questions, or on any particular question, affecting the company as a whole, which, if exercised, would have yielded a majority of the votes capable of being exercised on such questions or question, or could then have obtained such control by an exercise at that time of a power exercisable by that person or at that person’s direction or with that person’s consent,
(ii)that person then had the capacity, or could then by an exercise of a power exercisable by that person or at that person’s direction or with that person’s consent obtain the capacity, to exercise or to control the exercise of any of the following powers, that is:
(I)the powers of a board of directors of the company,
(II)powers of a governing director of the company,
(III)power to nominate a majority of the directors of the company or a governing director of the company,
(IV)the power to veto the appointment of a director of the company, or
(V)powers of a like nature;
(iii)that person then had a right to receive, or the receipt of, more than one-half of the total amount of the dividends of the company, whether declared or not, and for the purposes of this subparagraph, “dividend” is deemed to include interest on any debentures of the company, or
(iv)that person then had an interest in the shares of the company of an aggregate nominal value representing one-half or more of the aggregate nominal value of the shares of the company.
28
Taxable value of a taxable gift or inheritance.
[CATA 1976 s18]
(1)In this section, “incumbrance-free value”, in relation to a taxable gift or a taxable inheritance, means the market value at the valuation date of the property of which the taxable gift or taxable inheritance consists at that date, after deducting any liabilities, costs and expenses that are properly payable out of the taxable gift or taxable inheritance.
(2)Subject to this section (but except where provided in section 89), the taxable value of a taxable gift or a taxable inheritance (where the interest taken by the donee or successor is not a limited interest) is ascertained by deducting from the incumbrance-free value of such a taxable gift or a taxable inheritance the market value of any bona fide consideration in money or money’s worth, paid by the donee or successor for the gift or inheritance, including—
(a)any liability of the disponer which the donee or successor undertakes to discharge as that donee or successor’s own personal liability, and
(b)any other liability to which the gift or inheritance is subject under the terms of the disposition under which it is taken,
and the amount so ascertained is the taxable value, but no deduction shall be made under this subsection in respect of any liability which is to be deducted in ascertaining the incumbrance-free value.
(3)Where a liability (other than a liability within the meaning of subsection (9)) for which a deduction may be made under subsection (1) or (2) is to be discharged after the time when it is to be taken into account as a deduction under either of those subsections, it is valued for the purpose of making such a deduction at its current market value at the time when it is to be so taken into account.
(4)The taxable value of a taxable gift or a taxable inheritance, where the interest taken by the donee or the successor is a limited interest, is ascertained as follows—
(a)the value of the limited interest in a capital sum equal to the incumbrance-free value is ascertained in accordance with the Rules contained in Schedule 1, and
(b)from the value ascertained in accordance with paragraph (a) a deduction is made in respect of the market value of any bona fide consideration in money or money’s worth paid by the donee or the successor for the gift or the inheritance and the amount remaining after such deduction is the taxable value, but no deduction is made under this paragraph in respect of any liability which is to be deducted in ascertaining the incumbrance-free value.
(5)A deduction shall not be made under this section—
(a)in respect of any liability the payment of which is contingent on the happening of some future event, but if the event on the happening of which the liability is contingent happens and the liability is paid, then, on a claim for relief being made to the Commissioners and subject to the other provisions of this section, a deduction is made in respect of the liability and such adjustment of tax as is appropriate is made; and such adjustment is made on the basis that the donee or successor had taken an interest in possession in the amount which is to be deducted for the liability, for a period certain which was equal to the actual duration of the postponement of the payment of the liability,
(b)in respect of any liability, costs or expenses in so far as the donee or successor has a right of reimbursement from any source, unless such reimbursement can not be obtained,
(c)in respect of any liability created by the donee or successor or any person claiming in right of the donee or successor or on that donee or successor’s behalf,
(d)in respect of tax, interest or penalties chargeable under this Act in respect of the gift or inheritance, or of the costs, expenses or interest incurred in raising or paying the same,
(e)in respect of any liability in so far as such liability is an incumbrance on, or was created or incurred in acquiring, any property which is comprised in any gift or inheritance and which is exempt from tax under any provision of this Act or otherwise,
(f)in the case of any gift or inheritance referred to in section 6(1)(c), 6(2)(d), 11(1)(b) or 11(2)(c) in respect of—
(i)any liability, costs or expenses due to a person resident outside the State (except in so far as such liability is required by contract to be paid in the State or is charged on the property which is situate in the State and which is comprised in the gift or inheritance), or
(ii)any liability, costs or expenses in so far as the same are charged on or secured by property which is comprised in the gift or inheritance and which is not situate in the State,
except to the extent that all the property situate outside the State and comprised in the gift or inheritance is insufficient for the payment of the liability, costs or expenses,
(g)for any tax in respect of which a credit is allowed under section 106 or 107.
(5A)Notwithstanding section 57(3), relief shall be given under subsection (5)(a) on a claim which shall be made within 4 years after the liability referred to in that paragraph has been paid.
(6)In the case of a gift or inheritance referred to in subsection (5)(f), any deduction to be made under subsection (2) or (4)(b) is restricted to the proportion of the consideration which bears the same proportion to the whole of the consideration as the taxable gift or taxable inheritance bears to the whole of the gift or the whole of the inheritance.
(7)A deduction shall not be made under this section—
(a)more than once for the same liability, costs, expenses or consideration, in respect of all gifts and inheritances taken by the donee or successor from the disponer, or
(b)for any liability, costs, expenses or consideration, a proportion of which is to be allowed under section 89(2)(ii) or (iii) in respect of a gift or inheritance taken by the donee or successor from the disponer.
(8)Where a taxable gift or a taxable inheritance is subject to a liability within the meaning of subsection (9), the deduction to be made in respect of that liability under this section shall be an amount equal to the market value of the whole or the appropriate part, as the case may be, of the property, within the meaning of section 5(5).
(9)For the purpose of subsection (8), “liability”, in relation to a taxable gift or a taxable inheritance, means a liability which deprives the donee or successor, whether permanently or temporarily, of the use, enjoyment or income in whole or in part of the property, or of any part of the property, of which the taxable gift or taxable inheritance consists.
(10)Where—
(a)bona fide consideration in money or money’s worth has been paid by a person for the granting to that person, by a disposition, of an interest in expectancy in property, and
(b)at the coming into possession of the interest in expectancy, that person takes a gift or an inheritance of that property under that disposition,
the deduction to be made under subsection (2) or (4)(b) for consideration paid by that person is a sum equal to the same proportion of the taxable value of the taxable gift or taxable inheritance (as if no deduction had been made for such consideration) as the amount of the consideration so paid bore to the market value of the interest in expectancy at the date of the payment of the consideration.
(11)Any deduction, under this section, in respect of a liability which is an incumbrance on any property, is, so far as possible, made against that property.
29
Contingencies affecting gifts or inheritances.
[CATA 1976 s20]
(1)Where, under a disposition, a person becomes beneficially entitled in possession to any benefit and, under the terms of the disposition, the entitlement, or any part of the entitlement, may cease on the happening of a contingency (other than the revocation of the entitlement on the exercise by the disponer of such a power as is referred to in section 39), the taxable value of any taxable gift or taxable inheritance taken by that person on becoming so entitled to that benefit is ascertained as if no part of the entitlement were so to cease; but, in the event and to the extent that the entitlement so ceases, the tax payable by that person is, to that extent, adjusted (if, by so doing, a lesser amount of tax would be payable by such person) on the basis that such person had taken an interest in possession for a period certain which was equal to the actual duration of such person’s beneficial entitlement in possession.
(1A)Notwithstanding section 57(3), relief shall be given under subsection (1) on a claim which shall be made within 4 years after the entitlement referred to in that subsection ceases.
(2)Nothing in this section shall prejudice any charge for tax on the taking by such person of a substituted gift or inheritance on the happening of such a contingency.
Capital Acquisitions Tax Consolidation Act 2003 (Number 1 of 2003)
30
Valuation date for tax purposes.
[CATA 1976 s21]
(1)Subject to subsection (7), the valuation date of a taxable gift is the date of the gift.
(2)The valuation date of a taxable inheritance is the date of death of the deceased person on whose death the inheritance is taken if the successor or any person in right of the successor or on that successor’s behalf takes the inheritance—
(a)as a donatio mortis causa, or
(b)by reason of the failure to exercise a power of revocation.
(3)If a gift becomes an inheritance by reason of its being taken under a disposition where the date of the disposition is within 2 years prior to the death of the disponer, the valuation date of the inheritance is determined as if it were a gift.
(4)The valuation date of a taxable inheritance, other than a taxable inheritance referred to in subsection (2) or (3), is the earliest date of the following:
(a)the earliest date on which a personal representative or trustee or the successor or any other person is entitled to retain the subject matter of the inheritance for the benefit of the successor or of any person in right of the successor or on that successor’s behalf,
(b)the date on which the subject matter of the inheritance is so retained, or
(c)the date of delivery, payment or other satisfaction or discharge of the subject matter of the inheritance to the successor or for that successor’s benefit or to or for the benefit of any person in right of the successor or on that successor’s behalf.
(5)If any part of a taxable inheritance referred to in subsection (4) may be retained, or is retained, delivered, paid or otherwise satisfied, whether by means of part payment, advancement, payment on account or in any manner whatever, before any other part or parts of such inheritance, the appropriate valuation date for each part of the inheritance is determined in accordance with that subsection as if each such part respectively were a separate inheritance.
(6)The Commissioners may give to an accountable person a notice in writing of the date determined by them to be the valuation date in respect of the whole or any part of an inheritance, and, subject to the determination of an appeal made under subsection (9), the date so determined by the Commissioners is deemed to be the valuation date.
(7)If a taxable inheritance referred to in subsection (4) or (5) is disposed of, ceases or comes to an end before the valuation date referred to in those subsections in such circumstances as to give rise to a taxable gift, the valuation date in respect of such taxable gift is the same date as the valuation date of the taxable inheritance.
(8)Notwithstanding anything contained in this section, the Commissioners may, in case of doubt, with the agreement in writing of the accountable person or that person’s agent, determine the valuation date of the whole or any part of any taxable inheritance and the valuation date so determined is substituted for the valuation date which would otherwise be applicable by virtue of this section.
(9)An accountable person aggrieved by a determination of the Commissioners made under subsection (6) in respect of that person may appeal the determination to the Appeal Commissioners, in accordance with section 949