MyCo has been offered a client equity stake as part of a big deal we are doing. There are four employees who would be glad to have the equity stake. Please spare me the obligatory warnings of why this is a bad idea. We've weighed the risks and benefits, and judge it to be worth the risk.
The company was valued for estate tax purposes earlier this year, due to the death of one of the principals. It is a non-EU company, privately held. There are both voting shares and non-voting shares, at a ratio of 20 non-voting to 1 voting. In all other rights the shares are equal. The shares we are being offered are non-voting shares, and contractually cannot be sold for two years.
One shareholder owns approximately 70% of the non-voting shares but no one owns a controlling stake of the voting shares. The company has been valued at approximately £70 million. The share on offer to MyCo is just under 0.3% (around £200K, on a pro-rata basis, if the estate tax valuation is used).
The intent is to pay out the shares as a scrip dividend to the individuals involved. The question is A) what value is used for CT purposes B) what value is used for dividend tax purposes C) what value is used for purchase price in future capital gains tax calculations and D) can the estate tax valuation be used?
I have been told by my accountant that A=B=C, that the answer to D is yes, and that a nonmarketability discount of 75% would be appropriate, so that for tax purposes the pro-rata £200K would become approximately £50K, which would be applied to the company for CT, and prorata to the four shareholders for their dividend tax. I was told that normally this small of a percentage in a privately held company would attract a 60-70% discount but the fact that the shares are non-voting and restricted for two years justifies a larger discount. I'm not sure the voting/non-voting thing matters much for this size of a stake, anyway. But the two-year restriction seems to me to justify an extra discount.
Without going into details, I wasn't left entirely confident that this is an area where my accountant has particular expertise, so I'm interested in the views of others. Should I go back to him and argue for a bigger discount given the restriction, or is his 75% reasonable?
The company was valued for estate tax purposes earlier this year, due to the death of one of the principals. It is a non-EU company, privately held. There are both voting shares and non-voting shares, at a ratio of 20 non-voting to 1 voting. In all other rights the shares are equal. The shares we are being offered are non-voting shares, and contractually cannot be sold for two years.
One shareholder owns approximately 70% of the non-voting shares but no one owns a controlling stake of the voting shares. The company has been valued at approximately £70 million. The share on offer to MyCo is just under 0.3% (around £200K, on a pro-rata basis, if the estate tax valuation is used).
The intent is to pay out the shares as a scrip dividend to the individuals involved. The question is A) what value is used for CT purposes B) what value is used for dividend tax purposes C) what value is used for purchase price in future capital gains tax calculations and D) can the estate tax valuation be used?
I have been told by my accountant that A=B=C, that the answer to D is yes, and that a nonmarketability discount of 75% would be appropriate, so that for tax purposes the pro-rata £200K would become approximately £50K, which would be applied to the company for CT, and prorata to the four shareholders for their dividend tax. I was told that normally this small of a percentage in a privately held company would attract a 60-70% discount but the fact that the shares are non-voting and restricted for two years justifies a larger discount. I'm not sure the voting/non-voting thing matters much for this size of a stake, anyway. But the two-year restriction seems to me to justify an extra discount.
Without going into details, I wasn't left entirely confident that this is an area where my accountant has particular expertise, so I'm interested in the views of others. Should I go back to him and argue for a bigger discount given the restriction, or is his 75% reasonable?
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