The need for a share valuation arises not only when an owner is looking to sell a company. There are many occasions where a specialist tax valuation needs to be sought, such as on the death of a shareholder (for probate purposes), gifts of shares made between family members or to a trust and when shares are issued to employees of a company.
Investment companies say for example a property investment company, would tend to be valued by reference to the value of the property owned. Trading companies, for example a company that manufactures components for use in agricultural machines, are usually valued based on earnings.
Farming companies can prove difficult to accurately value as they are seen to be a ‘special case’. This is in part due to the following:
- For some years now farmers, been encouraged to diversify into other business areas. For example, many farmers have developed extensive letting and or holiday lodge businesses on the farm.
- Farming also requires expensive plant and machinery, but said machinery can only be deployed seasonally, as opposed to in the manufacturing industry where machinery is intended for year-round use.
- External influences, such as shifting government policy, levels of subsidy, disease, weather play a huge part in determining the profitability of the business and thereby its market value.
The rule of thumb is for farming companies that have significant land assets (including diversified farming businesses that contain a significant bank of rental properties) or agricultural tenancies, an assets-based approach might produce a more accurate result. It is often the case though that this approach works best when considering the value of majority or controlling holdings. A key point to note with an assets-backed approach is that farmland will often be held on the balance sheet at cost. The extent to which hope value or potential development value is included in the valuation needs to be carefully considered.
There do exist other ways in which to arrive at a value of a farming company as a whole. One could look at the historic dividends paid and using discounted cash flow analysis, arrive at a value of the company that way. In practice, in the situation of a small to medium sized family farming company, this not always the most applicable method given that dividend yields do not always reflect the underlying profitability seeing as the level of dividend is commonly determined by tax planning arrangements.
After a value has been obtained for the company as a whole, this needs to be pro-rated amongst the individual shareholders. This can be a complex area, particularly where there exist multiple classes of share each with different rights and restrictions. The level of discount that is applied to minority holdings can also be contentious. There is no statute setting out the rate to apply based on voting/income/capital rights, however there is considerable case law and commentary on the subject, and careful consideration is needed at this stage on a case-by-case basis.
It is imperative that when a share valuation is being undertaken, the farm’s accountant and land agent or business adviser work closely in concert with one another. Typically, while an accountant may be more experienced in determining with the level of discounts that may be applied for minority holders and dealing with HMRC on share valuation matters, it is often the case that the land agent/business advisor will have a broad knowledge of the business as a whole and will be abreast of developments on the farm, including the current market values of agricultural land and machinery. A robust share valuation that should withstand HMRC scrutiny will be one that is prepared using solid valuation principles, augmented by input from a land agent on current asset values and particular circumstances of the farm in question.
If you would like any further information on tax valuations, specific to the agricultural industry, please do get in touch with Churchgates either by phone (01284 701271) or by email ([email protected]).
