The valuation of assets can be important for tax purposes. For example, a valuation may determine the amount of inheritance tax (IHT) payable on a lifetime transfer (e.g. the transfer of an investment property to a discretionary trust), or on an individual’s death estate.
In addition, an asset valuation may be needed to determine the capital gains tax (CGT) liability on certain disposals (e.g. a gift of investment company shares from parents to adult children).
However, asset valuations can also be a crucial factor in determining the availability of tax relief in some cases. Two notable examples are highlighted below.
- Business asset disposal relief
The basic definition of ‘trading company’ for CGT business asset disposal relief (BADR) purposes is ‘a company carrying on trading activities whose activities do not include to a substantial extent activities other than trading activities” (TCGA 1992, Sch 7ZA, para 1(2); s 165A(3)).
There is no statutory definition of ‘substantial’ for BADR purposes, but it is generally accepted to mean ‘more than 20%’ (see HM Revenue and Customs (HMRC) Capital Gains manual at CG64090). There are several factors, some or all of which might be considered in determining whether non-trading activities are ‘substantial’ (i.e. income from non-trading activities, the company’s asset base, expenses incurred, time spent by officers and employees of the company in undertaking its activities, and the balance of indicators).
On the ‘company’s asset base’ test, HMRC states: “If the value of a company’s non-trading assets is substantial in comparison with its total assets then again, on this measure, this could point towards it not being a trading company.”
However, HMRC acknowledges that it may be appropriate to take account of business goodwill not shown on the balance sheet.
- Business property relief
A business owner may be eligible for IHT business property relief (BPR) if certain conditions are met.
However, the relief does not apply (subject to limited exceptions) to a business (or an interest in it) or company shares and securities where the business carried on consists wholly or mainly of dealing in securities, stocks or shares, land or buildings or making or holding investments (IHTA 1984, s 105(3)).
This ‘wholly or mainly’ test broadly means that if (say) a ‘hybrid’ company, i.e. comprising a trading business and an investment business (e.g. a company operating a manufacturing business and a residential lettings business) is 49% trading and 51% investment, an individual’s shares would not be eligible for any BPR at all, even in relation to the company’s trading activities.
HMRC’s guidance on valuing a business for BPR purposes states that the company’s balance sheet will be the main source of information about the value of business assets (and liabilities) at the date of death/transfer. HMRC includes goodwill within the list of assets to be taken into account, even where no goodwill is shown on the balance sheet (see HMRC’s Inheritance Tax manual at IHTM25082).
The valuation of goodwill is a specialist area. HMRC will normally refer the matter to its Shares and Assets Valuation specialists. Taxpayers and advisers are strongly advised to seek assistance from a valuation expert.
The above article was first published in Business Tax Insider (February 2020) (www.taxinsider.co.uk).