Valuing Company Shares After Death: Why It Matters for Inheritance Tax

When someone with a stake in a private company dies, their shares do not simply pass to the next generation. They need to be valued at the date of death, for both probate and Inheritance Tax (IHT) purposes and that valuation can be more contested than families often expect.

For business owners with shares in a family company, or executors dealing with an estate that includes one, understanding how that valuation works is a necessary part of getting probate right.

How HMRC approaches the valuation

For IHT purposes, shares are valued on the open market value basis. Broadly, this is the price a hypothetical willing buyer would pay a hypothetical willing seller at the date of death.

Because most private companies do not have an active market for their shares, a number of factors may need to be considered. These can include the company’s accounts, its profitability, its assets, and the terms of any shareholder agreement or articles of association that affect how the shares could be sold or transferred.

HMRC’s Shares and Assets Valuation team reviews and agrees these figures with executors and can challenge a valuation it considers too low.

Minority discounts, and where they can disappear

One area that can cause confusion is the value of a minority shareholding. Suppose someone owned 20% of a company worth £5 million. It does not automatically follow that their shares are worth £1 million.

A buyer of that 20% holding may have limited influence over how the company is run, when dividends are paid or whether the company is sold. There may also be restrictions on selling the shares to somebody else.

Those limitations can affect what a hypothetical buyer would be prepared to pay. As a result, a minority holding may attract a discount when compared with a simple percentage of the total company value, and HMRC’s valuation approach generally accepts this principle.

There is also a rule worth flagging for couples called ‘related property.’ If a spouse or civil partner holds shares in the same company, HMRC may value the holdings together rather than separately. A minority stake that would ordinarily attract a discount can therefore lose some or all of that benefit if it forms part of a combined, controlling holding.

Valuation matters even where relief may apply

Business Property Relief can reduce or remove the Inheritance Tax charge on qualifying business assets, but that does not make the underlying valuation an abstract exercise. The figure still matters for probate, for dividing an estate fairly between beneficiaries who may not all be inheriting shares, and for establishing a base value if the shares are sold later. Getting relief right and getting the valuation right are two separate questions, and both need proper attention.

Planning for business shares

Share valuation can become an important part of estate administration, particularly where a substantial private company interest is involved.

For business owners, reviewing how shares are owned, what rights attach to them and what should happen following death can help ensure that their corporate arrangements and estate planning work together.

MLP Law’s Private Client and Corporate teams can advise business owners and their families on succession planning, Inheritance Tax and the arrangements governing company shares.