In this Share Valuations for Companies blog, the main message is that having a valuation is vital. This area is very interesting to me. A recent Certificate in Capital Taxes only piqued that interest further. Audrey from KPMG gave an excellent presentation called Exit from a Business by way of Transfer to the Next Generation. I won’t get into valuation methods because that’s my business partner’s strong point. It’s more to focus on
- Background
- Why you need a valuation
- When you need a valuation
- Discount Tables
- Different values for taxes
- Don’t have a valuation
Background
What was fascinating about Audrey’s webinar was her insight into dealing with Revenue. KPMG would have lots of clients in the Large Cases Division. Her experience of those interactions and sharing some tips was very helpful. It isn’t the case that a valuation is a nice-to-have. It is a must-have, and Revenue will look for the valuation to support the numbers. You have to assume they will look for this in any transfer of shares. Not having one will be costly and leave you exposed, as we will see below.
Over the years, we have worked on many business disposals for clients. Usually, the numbers are large, and the tax reliefs in play are very valuable. All the numbers used for taxes result from a robust share valuation—the stuff Ger loves.
Why you need a valuation
There are many reasons why you need a valuation. Transfer of assets between family members are known as connected party transactions. For Capital Gains Tax purposes, any connected party transaction must be at market value. And how do you determine market value? You get a valuation. A company share is an asset in the same way as a house or apartment is. A parent transferring some shares in their company to a child is disposing of an asset.
There is CGT when you sell an asset. Likewise, the child receiving that share is getting an asset. They are receiving a gift (assuming they are not paying for it). When you receive a gift, you are liable to CAT or gift tax. The parent transferring the share needs to know the value of what they gifted. They’ll be liable to CGT on that value, unless they can avail of reliefs. Their child will pay CAT on that value, subject to reliefs also. But if the child sells that share in the future, what is the base cost for that sale?
So, in a nutshell, you’ll need a valuation to determine
- Sales proceeds for the seller for CGT
- The value of the gift for Gift Tax/CAT
- The Stamp Duty cost. There is 1% stamp duty on the transfer of shares.
- The value for thresholds for CGT and reliefs for CAT
Revenue expect a valuation
Revenue expect you to have a valuation. In Capital Taxes, there are various reliefs for CGT. The two most common ones are Entrepreneurs’ Relief and Retirement Relief. For Gift/Inheritance tax, Business Property Relief is very valuable. If you are claiming these reliefs, Revenue expect you to know the amount of relief claimed. You know that by having a proper valuation.
Given that these reliefs are valuable, a lot of tax is at play. If you save a few hundred thousand euros in tax, rest assured, Revenue will look at the transaction. Did you qualify for the relief, and what was the value of the relief claimed? What evidence do you have to confirm the value used?
And if there are no reliefs, you’ll be paying tax on the value of shares transferred. You can pluck a number from thin air, but it wouldn’t be advisable!
When you need a valuation
To answer the question of when you need a valuation, I’ll give you some examples of when we needed them in the past. These were for
- Share buybacks when parents were retiring from the business to make way for sons taking over
- A business sale to management by means of a management buyout
- An exit of a sibling where there was a family dispute
- Buying shares from a director who had exited a company
- Gifting a company to the next generations
- Transferring a sole trade business to a company [not a share valuation, but a goodwill valuation]
- A business sale to a third party. The owners wanted to know the value of the business before selling it.
We have a couple of current cases that need valuations, too. One involves transferring shares to two key employees as part of the KEEP scheme. The other is a company director gifting some shares in the business to his son in tranches.
As Audrey confirmed, even if there is no CGT or CAT on the transfer, you still need the market value to calculate the stamp duty liability. It is also needed to
- Establish the base cost of the shares for the recipient and
- You haven’t exceeded thresholds for CGT reliefs
Discount Tables
Discounts apply when arriving at the taxable value of shares in a private company. Revenue have some guidance on the level of discounts for CAT purposes in their CAT Part 21 manual.
| Shareholding | Discount Factor |
| 75% + | Nil discount or 5% at the most |
| 50% + 1 | 10% – 15% |
| 50% | 20% – 30% |
| 25% + 1 | 35% – 40% |
| Up to 25% | 50% to 70% |
Think of it, if you get 75% or more of a company, you control that company. But if you get 20%, you don’t control the company and may have limited influence on company decisions. Say Mick’s company is worth €2 million, and he passes 30% of the company to his daughter Marie. On the face of it, without a discount, the value of that shareholding is €600,000. But the discount factor for a shareholding of over 25% and less than 50% is 35-40%. As a result, the correct value is
| Value of 30% | €600,000 |
| Discount Factor 35% | €210,000 |
| Value | €390,000 |
Different values for taxes
To complicate matters further, there can be different values for the various taxes. There are different rules for CGT, CAT, and Stamp Duty. Looking at an example will make this easier to understand.
Tom and Greta Bagge own a successful trading company that is valued at €18,000,000. They are looking to exit and pass their shares to three children who are working in the business. They own 120 or 60 shares each, and both have worked full-time in the business since 2010.
The tax value of the shares in the company transferred to each child from each parent is as follows
| Tax Head | Shareholding | Share Value | Discount Rate | Discount Table |
| CAT | 16.67% | €3,000,000 | 0% | None |
| CGT ** | 16.67% | €1,950,000 | 35% | 35% to 40% |
| Stamp Duty | 16.67% | €1,200,000 | 60% | 50% to 70% |
There is a CGT law that confirms that the gifts from each parent are added together as it is coming from connected persons. As a result, the discount to apply is for the combined shareholding of 33.33% and not 16.67%.
No discount for CAT
You could be wondering why there’s no discount for CAT. As part of the CAT valuation rules, there’s a provision to not only look at the shares transferred but also who has control of the company. Where the transferee and the relatives of that person have control of the company, it may not be correct to apply a minority discount to a minority shareholding. This applies in our case. The Bagges, adding all the children’s shares together, own 100% of the company. As such, they control the company, and you wouldn’t apply a discount to the one-third shareholding that each child gets.
The rules mentioned above for CGT and CAT don’t apply to stamp duty. The discount applies based on the shareholding that each child gets from each parent.
Don’t have a valuation
If you don’t have a valuation, there will be trouble ahead. In a 2024 Tax appeals case, Revenue slapped a hefty tax bill on a business owner. The owner had a sole trade business and transferred that to a company. He valued the goodwill at €250,000, without a third-party valuation in place. He claimed Retirement Relief on the transfer of the goodwill and didn’t pay CGT on the disposal. Over a few years, the company paid €250,000 to the owner.
Revenue weren’t happy. They didn’t agree with the €250k valuation and got a valuer to value the business at a much lower number, at about €40k. They viewed the excess above €40k to be net salary of the company director and looked for PAYE. Not having a valuation was a disaster for that businessman, and he faced a large tax bill. Not having a valuation didn’t leave that taxpayer with a leg to stand on.
Audrey mentioned that in some of their cases with Revenue, they’d go to Revenue first. There could be lots of money at stake, and some taxpayers would be nervous about the approach Revenue could take. They may even get more than one valuation in some instances. This isn’t a rubber-stamping of the transaction by Revenue. It is more to give the taxpayer assurances that the transaction stands up after a senior Revenue official looks at it. It doesn’t prevent Revenue from taking a closer look at a future date. They keep their options open.
In her view, it was possible to agree the valuation and minority discount with Revenue beforehand, if your client is in LCD.
Code of Practice
There are set rules in the Code of Practice for Revenue Compliance Interventions about undervaluing assets. Those rules set out the category of tax default. It talks about the difference (A) between the valuation figure agreed (B) and the figure proposed by the taxpayer. One of the categories is
“If A is greater than (Bx50%) but not greater than (Bx60%), liability to a penalty arises, and the category of tax default for the purposes of reduced penalties is careless behaviour with significant consequences”
There are specific sections in the CAT and Stamp Duty legislation that provide for surcharges on the undervaluation of property.
Summary
Ger is the man who does the valuations for our clients. A lot of work goes into them, and rightfully so. They are valuable reports and will be open to Revenue scrutiny. You, as the taxpayer, must be happy with the numbers involved. After all, they are going on the various CGT, CAT, and Stamp Duty returns. You must assume Revenue will scrutinise the transaction at some stage. That’s their job, and you don’t want to give them an easy win.
The discounts involved can be confusing, but the key is to be aware of the different rules for the three taxes.
Do you need help valuing your company? If so start here
