Any shares owned in a private company, such as a family business, must be valued appropriately for probate purposes. How should this value be determined?

Why is it important to value shares? 

An estate’s Executors or Administrators (Personal Representatives (PRs)) are required by law to value all assets, including company shares, at their ‘open market value' as if each item had been sold at the date of death: however, they must ensure that related property is also considered when determining the probate value of the shareholding in an unquoted company, as we discuss further below. 

There’s no market value readily available for shares which are not quoted on a stock market. So, the PRs must determine an appropriate market value of the shares as at the date of death (the probate value) for inheritance tax (IHT) reporting purposes.   

The valuation of privately owned company shares is an extremely complex area so it’s recommended that PR’s who are not experienced in this area should obtain the help of valuation specialists. 

How should family businesses be valued? 

Various valuation methodologies may be considered when estimating the open market value of a shareholding in a private company. The most appropriate approach/es to apply will be dictated by the specific nature of the company and shareholding being appraised.  

All typical valuation approaches will fall under one of three categories:  

The asset approach:

This assesses the value of a business by considering the market value of its underlying balance sheet, typically with reference to its net asset position. This approach is often suitable for non-going concerns, early-stage companies, or whereby the underlying tangible assets are deemed strongly representative of the company’s overall value. However, it doesn’t account for hypothetical goodwill related to ongoing trading, making it less applicable for valuing trading companies operating as going concerns. Despite its limited use in such cases, the Net Asset Value (NAV) method can serve as a baseline valuation, providing a meaningful assessment in scenarios considering the business’s break-up value.  

The income approach: 

This assesses the value of a business by converting anticipated future economic benefits into their present value through appropriate time-discounting. The discounted cash flow (DCF) method is a primary technique under this approach, involving the discounting of a business’s future expected cash flows, with respect to their “time-value of money” and associated risk of receipts. The resulting present values are then totalled to determine the current present value of all future cash flows, with considerations such as reliable cash flow forecasts, terminal value calculations for businesses with infinite lifespans, and the selection of an appropriate discount rate being crucial components of this valuation approach. 

The market approach: 

This assesses the value of a business by comparing it to relevant market benchmarks. This can involve comparison to publicly listed companies or analysing transactions involving similar target businesses. A capitalisation (or multiple) of earnings approach is one example, applying observed multiples to financial or operational metrics of the subject business, adjusting where appropriate for specific business risks. Multiples can be applied to various metrics, such as revenue, Earnings Before Interest, Taxes, Depreciation, and Amortisation (EBITDA), assets under management or tangible book values. The approach involves estimating ‘maintainable’ metrics for the business in question and selecting an appropriate multiple based on factors such as growth prospects, size, risk factors, control, marketability, and other relevant considerations in comparison to comparable companies. 

Once arriving at a total value for the business, additional adjustments may be considered when market valuing the relevant shareholding, including the size of the stake in question, and distribution rights and voting rights conferred by the subject share class (e.g. minority discounts for lack of marketability, lack of control, any relevant restrictions). 

Related property 

Sometimes the value to be attributed to the shares held in the estate is affected by other shares related to it, which were not owned by the deceased person but by their spouse or civil partner. These rules apply if the value per share for the combined shareholding (e.g. the deceased’s together with their spouse’s shareholdings) result in a higher value than when using a normal method of valuing just the deceased’s shares in the company.  

Why should PRs have a professional valuation if business relief is available? 

PRs are required by law to report the open market value of the shares on the Inheritance Tax (IHT) forms. This is important, not only so the correct IHT can be calculated, where 100% business relief is not available, but also to determine the probate value of shares. This value is required to determine the gain or loss on the subsequent disposal of the shares whether sold by the PR or a beneficiary.  

Risks for PRs 

PRs may sell the shares during the administration period, perhaps to settle estate liabilities, such as IHT, or transfer them to beneficiaries. As the probate value of the shares is used to calculate the gain or loss on the disposal of the shares, after the date of death, it means that, if the shares are not valued correctly, it could result in: 

• The estate or the beneficiary having a higher Capital Gains Tax liability if the shares are under-valued 

• And/or 

• Risk an HMRC enquiry into the probate valuation of the shares if they are under- or over-valued.  

There’s a risk PRs could be personally liable for any professional fees incurred to assist resolve HMRC’s enquiry as well as any penalties and interest HMRC impose, if HMRC determine that the shares have been valued incorrectly.   

Example scenario 

Chris, the PR of Duncan’s estate, used the nominal value (£50,000) for Duncan’s unquoted company shares for IHT purposes. Business Relief at 100% was available on the shares and so HMRC did not make an enquiry into the valuation of these shares when the IHT Account was submitted. A month after probate was granted, Chris sold the shares for £100,000 so that he could repay a loan that Duncan had taken out before he died. Over a year later when the estate tax return was due, and the Capital Gain on the disposal of the shares was calculated, Chris found out that capital gains tax of £9,400 was due as a result of the disposal.  

If Chris had valued the shares correctly, the shares would have been valued at their open market value (likely much closer to the £100,000 Chris received when they were sold) and there would have been little (or potentially no) taxable gain after deduction of the capital gains allowance as the disposal was made within two years of Duncan’s death.