How HMRC Values Shares in a Private Company

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If you own shares in a listed company — say, Tesco or BP — working out what they're worth is easy. You check the stock price. Done.

Private companies are a completely different story. There's no stock exchange. No published price. No market of buyers and sellers setting a value every second of the day. So when HMRC needs to put a number on your private company shares — for inheritance tax, for example — they have to work it out from scratch.

And the way they do it matters a great deal, because the valuation directly determines how much IHT your family will pay.

Who actually does the valuing?

HMRC has a specialist team called the Shares and Assets Valuation (SAV) division. These are the people who review share valuations submitted as part of probate, gift declarations, and tax returns.

When you (or your estate) declares a value for shares in a private company, SAV will look at it and decide whether they agree. If they don't, they'll come back with their own figure — and that's when negotiations begin.

This is why getting the valuation right from the start matters. A professional valuation, prepared properly, carries far more weight than a rough estimate on the back of a napkin.

The three main valuation methods

HMRC doesn't use a single formula. They choose from several approaches depending on what type of company it is and what it does. The three most common methods are:

1. Net asset value

This is the most straightforward approach and the one most commonly used for property investment companies. It's simple in principle: add up the market value of everything the company owns, subtract everything it owes, and the difference is the net asset value.

For a property company, that means:

• Properties valued at current market value (not what you paid for them)
• Minus outstanding mortgages and loans
• Minus any other liabilities — tax due, creditors, deferred tax on gains
• Plus cash in the bank and any other assets

The key word there is "starting point." As we'll see, there are adjustments that can significantly reduce the final figure.

2. Earnings-based valuation

This approach values a company based on its profits — essentially asking, "what would someone pay for a business that generates this level of income?"

It's commonly used for trading businesses — a consultancy, a restaurant chain, a manufacturing firm — where the value lies in the ongoing profit stream rather than the physical assets.

For property companies, earnings-based valuations are less commonly used. Rental income tends to be modest relative to the property values, and the real wealth sits in the bricks and mortar, not the profit margins. That said, HMRC may consider it as a cross-check.

3. Dividend yield basis

This method looks at the dividends the company actually pays out and values the shares based on the return an investor would expect. It asks: "If you're buying a stream of dividend income, what would you pay for it?"

Again, this is less relevant for property companies, where dividends can be irregular and don't necessarily reflect the underlying asset value. But it can come into play for minority shareholders who don't control dividend policy.

So that's the whole picture? Not quite.

If HMRC simply took the net asset value and called it a day, the valuation process would be straightforward. But there's a crucial second step: adjustments and discounts.

This is where things get interesting — and where the real planning opportunities exist.

Minority shareholding discounts

Here's a question that seems obvious once you hear it, but most people never think about: is a 25% stake in a company worth exactly 25% of the company's total value?

The answer, almost always, is no.

A minority shareholder can't control the company. They can't decide when to sell properties, how much dividend to pay, or whether to take on new debt. They're along for the ride. And a buyer in the open market would pay less for that lack of control.

HMRC recognises this. Minority shareholdings are typically valued with a discount of 20% to 50% depending on the size of the stake and the specific circumstances.

What justifies a larger discount?

The size of the discount depends on several factors, including:

• The size of the holding — a 10% stake typically gets a larger discount than a 49% stake
• Voting rights — do the shares carry votes? Can the holder block special resolutions?
• Transfer restrictions — do the articles require board approval to transfer shares? Is there a pre-emption clause?
• Dividend rights — are the shares entitled to dividends, or are they restricted?
• Whether there's a willing buyer — who would realistically buy a minority stake in a family property company?

The more restrictions and limitations attached to the shares, the larger the discount. But — and this is important — those restrictions have to be genuine. They need to serve a real commercial or family purpose. HMRC will look through arrangements that exist purely to manufacture a discount.

Articles of association: the fine print that matters

The company's articles of association are the rulebook for how the company operates. And for valuation purposes, they're crucial.

Articles can include provisions like:

• Pre-emption rights — existing shareholders get first refusal before shares can be transferred to outsiders
• Director approval requirements — the board must approve any share transfer
• Restrictions on dividend payments — certain share classes may have limited or no dividend rights
• Drag-along and tag-along rights — rules about what happens if a majority shareholder wants to sell

These provisions can significantly affect the value HMRC places on the shares. A share that can't be freely transferred, doesn't carry full voting rights, and has restricted dividends is worth considerably less than an unrestricted ordinary share.

Getting the valuation right

HMRC's SAV team are experienced negotiators. They review thousands of share valuations every year, and they know what reasonable looks like. Submitting an aggressive valuation without proper justification will just trigger a lengthy dispute.

A professional valuation — prepared by someone who understands how SAV thinks — carries real weight. It should:

• Use up-to-date property valuations (ideally RICS-standard)
• Reflect the actual articles of association and shareholder agreements
• Apply appropriate discounts with clear reasoning
• Consider the specific characteristics of the shares being valued

Getting this wrong can be expensive in both directions. Overvalue the shares, and your family pays too much IHT. Undervalue them, and HMRC will challenge it — potentially with penalties and interest added on.

Where does restructuring fit in?

You might be reading this and thinking: "If minority stakes get discounted, and restricted shares are worth less, can I restructure my company to take advantage of that?"

The short answer is yes — but it has to be done carefully and for genuine reasons. Creating new share classes, splitting ownership between family members, and updating the articles of association are all legitimate actions. Companies restructure their share capital regularly for sound commercial and family governance reasons.

The key is that the structure has to reflect reality. If you give your children shares but keep all the control and all the income, HMRC will see through it. If you create genuine minority holdings with real restrictions, that's a different story entirely.

The details of how this works in practice depend on your specific situation — the value of the portfolio, your family structure, your age, and what you want to achieve. It's not something to attempt without proper advice.

The bottom line

Valuing shares in a private company isn't as simple as looking up a price. HMRC uses established methods — primarily net asset value for property companies — but the final figure depends heavily on the rights attached to the shares and who holds them.

Minority discounts, transfer restrictions, and share class structures all play a role. And they're not loopholes — they're a recognised part of how HMRC values shares.

Understanding how this works is the first step. Acting on it — with proper professional guidance — is what actually reduces the bill.