When considering estate and succession planning, it is natural to focus on structure first: what should be gifted, when assets should be transferred, whether a trust may be appropriate or how wealth should pass to the next generation. However, before those decisions are made, there is a more fundamental question to consider: what are the assets actually worth?

For clients with business interests, understanding value early can have a significant impact on the advice that follows. Bringing tax and valuation expertise together at the outset can help identify potential issues, test whether proposed planning is appropriate and reduce the risk of decisions being made based on incomplete information.

Looking beyond the headline figures

A balance sheet can provide a useful starting point, but it does not necessarily reflect the true value of a business. A valuation will often need to consider the wider commercial picture, including profitability, the sustainability of earnings, the quality and concentration of revenue, the customer base and future prospects.

For example, a client may initially believe that their business interest sits comfortably within the parameters of their proposed estate planning. Once profitability, future prospects and the wider commercial position of the business are considered, however, the valuation may look very different.

Understanding value at the outset can therefore help establish the parameters for the tax advice before more detailed work begins.

Valuing a minority interest

Where a client owns a minority shareholding, the value of that interest may not be as straightforward as applying a proportion of the overall value of the business. This is where control becomes important. A minority shareholder may have limited influence over the company; they may be unable to determine when dividends are paid, influence strategic decisions or decide when the business is sold. These factors can impact the value of their shares. Shareholder agreements, voting rights and the relationship between shareholders can all have a significant impact on the value of an individual interest.

This is why valuation is often highly specific to the circumstances. It requires an understanding not only of the financial information, but also of what the shareholding represents in practice and the rights and restrictions that attach to it.

How valuation can shape the planning

Once there is a clearer understanding of value, this can inform a range of estate and succession planning decisions.

A client may be considering lifetime gifts, transfers between spouses, the use of trusts or a restructuring of their shareholding, perhaps via a share reclassification involving Freezer shares and Growth shares. The latter can be useful where a client wishes to retain the current value of an interest while passing future growth to the next generation. In each case, the underlying valuation is important.

A higher valuation than initially expected could mean that a proposed lifetime transfer has different tax implications, prompting the client and their advisers to reconsider the timing, structure or extent of the transfer.

An early valuation discussion can help establish whether a proposed approach remains appropriate before significant work is undertaken.

Considering future scrutiny

Valuation is also relevant when considering how planning may be viewed at a later date.

A transaction undertaken today may be reviewed several years later, particularly if a business is subsequently sold or its value changes significantly. Any valuation relied upon should therefore be capable of supporting the the position taken at the time. This means considering the information available, documenting the assumptions made and ensuring that the conclusion reflects both established valuation principles and the commercial reality of the business.

In many cases, a preliminary valuation range may be sufficient to help advisers understand the position, identify any areas of risk and determine whether more detailed work is required.

Bringing advisers together early

One of the key benefits of involving valuation specialists at an early stage is that it can support a more informed and efficient planning process.

An initial discussion can help identify whether value is likely to be a material consideration before detailed tax, legal or restructuring work begins. It also allows the advisers involved to work from the same understanding of the client’s position.

For private client lawyers, tax advisers and valuation specialists, this integrated approach can be particularly valuable where clients hold business interests or other assets whose value is not immediately clear.

Ultimately, effective estate and succession planning depends on understanding not only how assets may be transferred and the associated tax implications, but also what those assets are worth and the risks associated with the proposed planning.

If you would like to discuss how a valuation could support your client’s estate or succession planning, please get in touch with our Private Client or Valuations teams. We would be happy to talk through the circumstances and consider the most appropriate next steps.