Valuing Unquoted Shares for Inheritance Tax: HMRC SAV and the Open Market Value Test
Private company shares are valued at open market value for IHT under s160 IHTA 1984. HMRC's Shares and Assets Valuation (SAV) division negotiates valuations with the estate. Earnings multiples, dividend yield, and asset-based approaches are all used — with minority discounts reducing the value of non-controlling stakes.
Valuation Methods for Unquoted Shares
| Method | Best For | How It Works | Minority Discounts |
|---|---|---|---|
| Earnings multiple (P/E basis) | Profitable trading companies | Multiply maintainable post-tax earnings by a suitable price/earnings ratio. The P/E ratio is derived from comparable quoted company multiples, discounted for the lack of marketability and size. A controlling interest in a profitable SME is typically valued on 5-10x earnings. | Minority discount typically 25-40% for minority stakes |
| Dividend yield | Minority interests in profitable companies | Capitalise the actual or notional dividend at a yield reflecting the risk and size of the company. Used where a minority holder has no control over the company's dividend policy — they can only receive dividends if declared. The yield is higher (lower multiple) than for comparable quoted companies. | Reflects minority position inherently |
| Net asset basis (NAV) | Investment holding companies, property companies, asset-rich businesses | Value the underlying assets (property, investments, cash) and deduct liabilities. A controlling interest is typically valued close to NAV; minority interests may be discounted 20-40% below NAV. For property companies, the property is valued at market value (usually by a surveyor). | Minority discount varies — could be 15-40% below pro-rata NAV |
| Dividend yield / maintainable earnings hybrid | Mixed companies with both earnings and asset value | HMRC SAV sometimes applies a blended approach, particularly where the company holds significant investment assets alongside a trading business. Each component is valued separately and combined. | Depends on the composition |
| Industry-specific multiples (e.g. revenue multiple for tech/SaaS) | Pre-profit or high-growth companies | Where earnings-based methods are inappropriate (losses, rapid growth), industry multiples (revenue multiple, EBITDA multiple) derived from comparable private M&A transactions may be used. Less common for HMRC purposes but relevant for modern tech/IP businesses. | Minority discount and marketability discount still apply |
Frequently Asked Questions
How are unquoted shares valued for Inheritance Tax purposes?
Under s160 IHTA 1984, the value of any estate asset is its open market value — the price it might reasonably be expected to fetch if sold in the open market on the date of death. For unquoted (private company) shares, there is no quoted market price, so the valuation requires professional expertise. The hypothetical market for unquoted shares is assumed to be an informed buyer and seller dealing at arm's length, with the buyer having access to all available information about the company (accounts, management information, forecasts). HMRC's Shares and Assets Valuation (SAV) division at HMRC (formerly the Share Valuation Division) is responsible for agreeing IHT valuations for unquoted shares. Executors typically instruct an independent accountant or professional valuer to prepare a valuation, then submit it to HMRC SAV for agreement as part of the IHT400 probate process. HMRC SAV may accept the valuation, query it, or counter with its own view — the process involves negotiation and, if not agreed, appeal to the First-tier Tribunal (Tax Chamber).
What is the minority discount for IHT valuation of private company shares?
A minority shareholding in a private company is worth less than its pro-rata share of the company's total value because a minority holder cannot: (1) force a sale of the company; (2) control dividend payments; (3) appoint or remove directors; or (4) alter the company's strategy. A hypothetical purchaser of a small minority stake would pay a discounted price relative to a controlling stake. HMRC SAV accepts minority discounts in principle but scrutinises the level. Typical discounts for IHT purposes: (1) a 10-25% holding (no blocking rights, no control): 25-40% discount to pro-rata value; (2) a 26% holding (blocking rights for special resolutions but no control): 15-25% discount; (3) a 40-50% holding (significant influence but no majority control): 5-15% discount. The appropriate discount depends on the specific rights attaching to the shares (the articles of association), the company's dividend history, and the commercial value of the holding. A minority holder in a company that pays generous dividends and is likely to be sold soon faces a smaller discount than a minority holder in a family company that retains all profits and has no exit in sight.
What information does HMRC SAV require to agree an IHT valuation of unquoted shares?
HMRC SAV will require the following documents to review and agree a valuation: (1) Accounts for the company for the last 3-5 financial years (signed accounts, not management accounts). (2) Management accounts to the valuation date if accounts are not available for the most recent period. (3) Business plan or forecast if available. (4) Details of any recent transactions in the company's shares — arm's-length third-party sales, management buyouts, or employee share scheme transactions are particularly relevant as benchmarks. (5) A description of the business: trading history, key customers, key employees, market position, competitive environment. (6) The articles of association and any shareholders' agreement. (7) Details of assets: property, plant, intellectual property, significant cash or investment holdings. (8) Details of any pending material events: sale negotiations, litigation, significant contracts. The quality of the valuation report submitted by the executor's professional adviser will strongly influence how quickly HMRC SAV agrees a value.
What is the effect of BPR on the valuation of unquoted shares?
Business Property Relief (BPR) and valuation are separate questions. First, the shares are valued at open market value (s160 IHTA 1984). Then, if BPR applies, the relief reduces the chargeable value — 100% BPR means the IHT charged on the shares is nil; 50% BPR means IHT is charged on half the value. BPR does not affect the valuation methodology — the shares are still valued at what a purchaser would pay. For IHT purposes, this means that even where shares attract 100% BPR, the open market value must still be calculated and agreed with HMRC SAV because: (1) BPR can be challenged; (2) excepted assets within the company (non-qualifying cash, investments) are carved out of BPR and remain chargeable — the valuation determines the split; (3) the BPR cap (£2.5m from April 2026) means only the first £2.5m of qualifying value attracts 100% relief; above that, valuation directly affects the IHT cost. Executors should not assume that BPR makes valuation irrelevant — HMRC SAV engagement remains important.
What happens if HMRC SAV and the estate cannot agree on the value of unquoted shares?
If the estate and HMRC SAV cannot reach agreement on the value of unquoted shares after a period of negotiation, the estate can appeal to the First-tier Tribunal (Tax Chamber). The Tribunal hears evidence from expert witnesses — typically qualified business valuers — instructed by each side. The Tribunal decides the correct value. The proceedings are formal: written evidence, skeleton arguments, and an oral hearing before a Tax judge and specialist member (for valuation cases). The Tribunal's decision is binding, subject to appeal to the Upper Tribunal on points of law. In practice, most IHT share valuation disputes are resolved by negotiation between the estate's adviser and HMRC SAV — appeal to the Tribunal is relatively uncommon, reserved for cases where the parties are far apart or where a principle of valuation methodology is at stake. Costs in the First-tier Tribunal are not generally awarded — each side typically bears its own costs — so the estate must weigh the professional cost of Tribunal proceedings against the likely IHT saving from a lower agreed value.
Are there any special rules for valuing shares in a company that owns UK property?
For companies that own UK residential property, the IHT valuation of the shares and the ATED (Annual Tax on Enveloped Dwellings) regime interact. From April 2017, s48(3A)–(3B) IHTA 1984 brought shares in non-UK close companies owning UK residential property into the IHT estate of UK residents (anti-avoidance). For valuation, if the company's primary assets are UK residential properties, the NAV method is appropriate — the underlying properties are valued at open market value, typically by a RICS-qualified surveyor. The share value is then the net asset value per share, applying minority discount if applicable. Deferred tax on latent gains in the company (CGT if the properties were sold) is a valuation point often debated with HMRC SAV: HMRC accepts a limited deferred tax discount in some circumstances, particularly where the company is in active liquidation. This is a specialist area requiring advice from both tax and real estate valuers.
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