Planning for the future

Planning for the future: could a valuation help save tax?

Businesses don’t run themselves and so for some business owners, the need for a valuation may only become a priority when considering an exit strategy. But the chance to save some tax is always attractive, and using a professional valuation can really help back up tax planning at any stage in the life of a business.

Use of trusts

Trusts can be an extremely flexible way of inter-generational planning. There are a variety of structures available which can offer tax-efficient income redistribution to family members and help ensure protection and succession of assets, including shares in small and medium sized companies. A taxpayer may want to place shares with a relatively high value into their trust in order to maximise the tax advantages, so a detailed valuation will ensure that the transaction does not exceed the nil rate band (currently £325,000) in order to avoid an immediate inheritance tax liability. This valuation can then be revisited at least every 10 years during the life of the trust to help with the ongoing effective trust tax planning and compliance.

A taxpayer may want to place shares with a relatively high value into their trust in order to maximise the tax advantages, so a detailed valuation will ensure that the transaction does not exceed the nil rate band (currently £325,000) in order to avoid an immediate inheritance tax liability. This valuation can then be revisited at least every 10 years during the life of the trust to help with the ongoing effective trust tax planning and compliance.

Capital gains tax planning

Even outside of a trust, valuations play a key part in supporting claims for valuable tax reliefs. For example, where shares are eligible for Entrepreneurs’ Relief any capital gain on the sale or gift of the shares is charged at only 10% (which would otherwise be 20% for a higher or additional rate taxpayer). Holdover relief allows capital gains tax to be deferred on the gift of business assets (such as unquoted trading company shares) with tax only payable on any future sale.

As you might expect, in order to benefit from these reliefs various conditions need to be met. For instance, no more than 20% of a company’s activities or capital assets can relate to non-trading/investment activities. The company accounts will reflect assets based on a variety of accounting policies and so a valuation may be needed to prove eligibility for any relief.

Inheritance tax savings

Business Property Relief is an inheritance tax relief which can reduce the charge on qualifying assets by 50% or 100%. Again valuations are commonly called upon to show that the company meets a requirement that it is mainly a trading company (in this case 51%). Where Business Property Relief is not fully available a valuation will also be needed when a business owner passes away in order to accurately prepare the inheritance tax return, and in some cases to negotiate a more favourable valuation with HMRC, especially where a minority shareholding is involved.

If you’d like to find out more about tax planning and valuations, please get in touch.

Lake Falconer About the author

I head up PEM’s business valuation team providing valuations for shareholder exits, disputes, business planning, tax and accounting, and matrimonial disputes. In addition, I am a Partner in PEM Corporate Finance, a specialist team advising on management buy outs, corporate acquisitions and disposals, succession and strategic planning.

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