CGT and Shares in Estates Valuation Trap

In the UK, there are quite generous exemptions from Inheritance Tax (IHT) which apply to business assets. One problem with making use of such exemptions is the effect this may have on the subsequent value of the relevant assets for Capital Gains Tax (CGT) purposes. Under S274 of the Taxation of Chargeable Gains Act 1992, the ‘base cost’ value of such assets for future CGT purposes is the IHT value, provided that value has been ‘ascertained’.

This can be especially important when assets are aggregated for IHT purposes. For example, if a deceased person owned 15 per cent of an unquoted company’s shares in his own name and had an indirect interest (say through a trust in which he held a life interest) in another 40 per cent, the IHT valuation would be on the basis of having a controlling (greater than 50 per cent) interest. If the company is a trading company, Business Property Relief (BPR) would apply and in the case of a controlling interest, BPR is given at 100 per cent.

The Capital Taxes Office will not in such circumstances wish to enter into negotiations about the value of these shares and will simply regard the value transferred as nil. The value, therefore, will not have been ‘ascertained’, which may lead to a later dispute about the real value of the shares at the date of death, when the value may well be much harder to ascertain or at least agree.

One possible way around this dilemma is for the executors to submit a valuation of the shares, preferably with the benefit of a valuation by an appropriate professional. This is likely to be ignored by HM Revenue and Customs when dealing with the estate taxation, as 100 per cent BPR will apply. On a subsequent disposal of the shares, that valuation – probably unchallenged – can be used to help to justify the base cost in the CGT computation. […]