Writing for Taxation magazine’s Readers’ Forum, BKL tax consultant Terry Jordan responds to a reader’s query about valuing non-voting shares in the context of a family-owned property investment company.
‘Readers’ views would be appreciated on the approach to valuing non-voting shares in the context of a family-owned property investment company. We have come across a situation recently where parents own 20% of the issued share capital of a property investment company, and a trust for their three adult children owns the remaining 80%. The parents have other business interests and have concluded that it would make sense for the remaining 20% that they own in this company to be gifted to the children outright, particularly as the parents have realised some capital losses which could be offset against the resulting capital gains.
We were initially comfortable about the approach we were going to take to valuing the parents’ 20% shareholding, being a minority interest, however on reviewing the articles of association, it has come to our attention that the trust’s 80% shareholding is a separate class of shares identical to the parents’ shareholding in all respects, except that the trust’s shareholding is non-voting.
Given the 80% has been held within a trust we are puzzled as to why whoever set up the arrangement felt it necessary for the trust’s shares to be non-voting, given there would appear to have been adequate protections provided by virtue of the shares being held within a trust. Be that as it may, for the avoidance of doubt we have been advised that there haven’t been any situations since the shares were transferred into the trust where it was considered the shares needed to be non-voting – it seems like a slightly unnecessary ‘belt and braces’ approach taken at the time, which is now potentially causing a valuation complication.
Our dilemma is, therefore, the extent to which any value has been skewed into the parents’ 20% shareholding, making them more valuable than they might otherwise have been, had all the shares had equal voting rights. What do readers think?’ Puzzled
Terry Jordan’s reply: Parents might transfer their shares to the trust and claim CGT holdover relief.
‘Puzzled does not tell us the value of the company or the nature of the trust. The parents’ shares hold all the votes and the trustees’ shares none.
The proposed outright gifts by the parents to the children would be potentially exempt transfers (PETs) for IHT purposes with complete exemption after seven years and a measure of taper relief after three years if their nil rate bands (NRBs) are exceeded. The gifts would constitute disposals for CGT purposes and holdover relief would not be available. For IHT purposes any tax charge would be based on the loss to their estates and for CGT the value of the 20% holding itself, albeit on the face of it the values would be the same for both taxes if all the shares are gifted.
In his book Principles of Share Valuation for Fiscal Purposes (1985) the late Bruce Sutherland wrote: ‘It is not uncommon for companies to have a class or classes of ordinary shares ranking pari passu as to profits, capital etc, with other ordinary shares but having no voting rights attached to them or only having such rights in relation to certain matters. The values of holdings of such shares will be affected in particular by: (a) the rights attaching to them under the articles of association; (b) the dividend policy of the board; (c) the composition of the holdings of voting ordinary shares; and (d) the prospect of sale or liquidation.
Where the ordinary shares of both voting and non-voting classes are widely held and especially where dividends are regularly paid of identical amounts on both classes, the discount from the value of a similar holding of voting shares for the absence of voting rights in the non-voting shares will usually be small, perhaps of the order of 15%.
Where the ordinary shares are closely held by members of the board and their associates who are able to enjoy participation in profits in the form of remuneration, the value of non-voting share may be very small indeed.
If the sale of the company as a whole is in prospect, the intentions of the board and of the holders of the voting shares in relation to the apportionment of the total price between the different classes of shares will be a relevant factor. If liquidation is in prospect, the values of holdings of the voting and non-voting ordinary shares may be similar if they both have the same rights on winding up.’
Although not relevant to a property investment company, Mr Sutherland made the point that at the time voting rights could affect entitlement to the higher level of business property relief for capital transfer tax purposes. In my view reintroduction of that provision, perhaps by a Labour government, would have implications for alternative investment market portfolios where clients have invested with IHT in mind.
In the present case depending on values the parents might transfer their shares to the trust and claim CGT holdover relief under TCGA 1992, s 260.’
The full article is also available on the Taxation website.
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