We have a saying in the HK offices, ""give five accountants the same information to value a business, and get five different answers".
Our view was supported by a recent House of Lords Finance Bill Sub-Committee reviewing the changes to Business Property Relief, and Agriculture Property Relief, where Valuations were discussed. The comment being made “Valuation, as we all know, is an art, not a science.” i.e. it is highly subjective! Although, if you are using the same information and there are two equally experienced valuers, what the valuers produce should be broadly similar – within an ‘acceptable valuation range’ in HMRC terminology. It is perhaps more accurate to say that what ‘art’ refers to is the fact that you cannot boil down a valuation to the formulaic application of a single set of rules which fit all circumstances. Our approach tends to be to adopt two methodologies, to see if the results are similar.
Why have Tax Valuations been important, and why are they becoming more important?
The House of Lords Sub-Committee has alluded to why in one tax area Valuations are becoming important, with business owners and farmers transferring assets to get ahead of the changes to Business Property Relief and Agriculture Relief in April 2026, with the introduction of the £1m allowance for each relief. For more details on the change see our article HERE.
For Inheritance Tax (“IHT”) purposes, historically if you had an asset that was going to qualify for Business Property Relief, you didn’t really need to give a value because there was no need to as exempt, you would put whatever you looked right, provided the asset met the qualifying test for the relief. However, now with these assets being chargeable to IHT above £1m, a detailed Valuation will be required.
It was noted by the Sub-Committee that HMRC do not have enough people in the Valuation team to probably cope with the increased work that the changes to IHT reliefs will bring. In addition, to which Valuations are subjective, there’s various ways to value, and we find when dealing with the HMRC Valuation team, it will take many months to try and reach a conclusion because of the different views in the approach taken.
The House of Lords Sub Committee comments came at a time, when HK were planning to raise with our clients our concerns re Valuations and their importance, with the requirement to have them undertaken, being more formally produced, whatever the asset or transaction. Outside of the changes to the IHT reliefs, we have seen through the increased level of tax enquiries/compliance checks, more interest in Valuations. The other main tax area being Employment Related Securities (in simple terms employees being given shares, or buying shares in their employer), which generally creates a tax liability.
We have one example of a client who made a significant gain on selling his US stock option rewards on the sale of his employer. HMRC opened an enquiry (as the amount was significant, which would have flagged on HMRC’s system), initially looking at the disposal, but then asked details of how he received the stock options, including the value. At the time a Valuation had been undertaken by PWC, but due to the Covid lockdown there was a delay of seven months before the options were granted, and although PWC confirmed to the employer there was no change in their Valuation issued earlier in the year, HMRC requested a Valuation based on the Company position at the date of grant. Two years later, and significant fees (PWC are not cheap), HMRC confirmed they agreed with the updated Valuation.
Unless we implement an approved HMRC employee share option scheme, it is not possible to agree values with HMRC in advance. (Although you don’t have to agree a value with HMRC for an approved share option scheme, we would always advise that you do to prevent issues down the road with both HMRC, and a future buyer). You can go to HMRC post transaction for a Valuation agreement, but many do not want to raise the point because of the subjective nature of Valuations, as it may never become an issue. Basically, most people take the view that they don’t get involved with HMRC on the point, unless have to.
The first bit of advice is take advice and have a Valuation prepared at the date of the transaction or the gift. At least then you have contemporary record of the facts, factors and points used to give the value you are relying on for tax purposes. The number of taxpayers who when asked do you have a Valuation, have nothing, and say it is what we thought at the time, which is staggering. The issue being that the value you have used may not be challenged for several years, and at the time of the enquiry you might not be able to access the information/records which would support the position taken.
Secondly, make sure that the Valuation is following the principles/approach where appropriate, which HMRC would take, some of which are changing. Several employers will use growth shares to reward and incentive employees, which historically have been valued using an industry standard, but HMRC have changed their approach wanting more weight put on the future opportunity, as opposed to just putting a low “hope” value.
The concept of the tax Valuation is commonly referred to as ‘hypothetical open market value’. This means the price negotiated between a willing buyer and willing seller both of whom are assumed to be anonymous and prudent parties under no compulsion to act. The key point is the Valuation is a market valuation, where the facts of the business, its market/sector, the economic climate etc. are considered, and not becoming peripheral or subservient to the tax advice which is being provided. i.e., let us depress the value as best we can to suit the tax planning, not the real situation of the business.
It should be noted that this article and our business concentrate on share, and share options, due to our client base and in the main our type of work, but getting an up to date valuation applies to the transfer of any asset, in particular property and land. In this area HMRC has a wealth of information it can access, to establish if the value you are applying to the asset is correct.
We have flagged on many occasions how much information HMRC now holds and is able to filter/use with its Ai driven IT platform Connect, therefore for assets other than non-listed company shares, HMRC can quite easily complete a sense check for an asset value.
In summary Tax Valuations are critically important. They form the basis for calculating various tax liabilities and ensure compliance with HMRC, helping to avoid penalties, disputes, and over or underpayment of tax. The fact that you have no Valuation record in place is going to result in an automatic problem regarding penalties, as you have not taken the due care and attention required.
