The valuation date is important in a number of contexts with gift and inheritance tax. The concept can be ambiguous particularly in the case of inheritances. It is generally clearer in the case of gifts.
The valuation date of a gift is generally the date of the transfer of assets. In the case of appointment from the trust assets, it is the date on which the assets are appointed (transferred) to the beneficiary. This need not involve the transfer of legal title. It may be the date when the assets go from being held under a discretionary trust to being held unconditionally by the trustee for a particular beneficiary.
In the case of inheritance, it is earliest of the date when the personal representative or trustee is entitled to retain the asset for the benefit of the beneficiary either legally or beneficially i.e. on his own behalf.
The date on which the asset is retained may be the date of delivery or payment to, or the satisfaction or discharge of the obligation to the successor. In the case of a donatio mortis causa an inheritance taken by the recipient the date is when the person giving it dies. Similarly, where a person has the power to revoke a benefit, the date is the date of death or the donor or other person.
See the separate section on succession in respect of the manner in which assets pass on death. Legal and beneficial title passes initially in most cases to the legal personal representative, be it an executor or administrator. The executor or administrator has duties to get in the assets and ultimately distribute them or the proceeds of sale in accordance with the will or the intestacy rules. The valuation date does not arise until the particular asset is retained for the benefit of the successor.
The benefit will be often ascertained and available for the successor even it not actually transferred. As the issue of a grant of representation is usually prerequisite to the transfer of assets from the estate, the valuation date will almost always be after the grant of probate or letters of administration.
In the case of a bequest of specific assets, the beneficiary may be held to be entitled to it from death at least if it is clear that the estate is solvent and it will not be required to pay debts or liabilities. The view is often taken that even in this case a grant of representation is required before the valuation date arises.
Generally, an executor or other personal representation may not be subject of proceedings to enforce administration or distribution of the estate assets within a year. It could be argued that the asset is not retained until that time. However, as against this, the concept focuses on the retention and availability in fact, rather than the right of the beneficiary to enforce that the distribution.
If the date of actual retention predates the entitlement to retention then the former is the valuation date. In any event, if an asset is paid or delivered or transferred, then this would be valuation date even if it is earlier.
In some cases, an external factor such as the existence of contingent liabilities or litigation makes postpone the valuation date. The executors may not be in a position to distribute the estate where proceedings are a risk or are pending given his prospective personal liability. This might arises in relation to a claim for a legal right share.
In some simple cases, the valuation date may precede grant of probate or the executor’s year. In the case of jointly owned property valuation date is the date of death.
Where the beneficiary is in actual possession of the assets such as the case of a bequest of a particular property, the date of death is usually the relevant date. If the estate is solvent and there is a bequest the valuation date may also be that date of death.
In the case of settled interests such as rights which pass automatically from a tenant for life to successor and that then the date of death of the life owner is likely to be the valuation dates.
If monies are advanced to a beneficiary prior to probate, this may be the valuation date.in respect of that payment.
The date of ascertainment of the residuary may often be the valuation date as it is the point in time the extent of the shares is known. It is possible that there are different valuation dates for different parts of the residue. Accordingly assets and elements of the estate are ascertained and fixed, then there may be valuation date referable to them with later valuation dates in respect of the remaining elements.
As a general proposition, the valuation date in the case of letters of administration will not be before the grant. Technically a will is valid from death and there is power to act under it. The grant of probate is a practical necessity as proof of the validity of the will as a true and last will of the deceased. In contrast, the assets of the deceased technically vest in the President of the High Court and the letters of administration vest entitlement as on their date, but not earlier.
Gift and inheritance tax is charged on the value of the gift or inheritance received. There are special rules applicable to particular asset classes or property types. The value is to be the market value as determined in the case of certain assets in accordance with special rules. It is the price which those assets might reasonably expected to obtain on a sale in the open market subject to such conditions as might be calculated to obtain for the seller, the best price.
The best price is generally understood to be the best price or market price in a fair and open competitive sale. The hypothetical seller is assumed to do what is necessary to obtain the highest price. However, he is not required to take unreasonable steps or undue expenditure. He may, however, be required to sell the property in particular lots.
Reference is made to a hypothetical seller and buyer. The fact that there might exist a hypothetical buyer who is willing to pay more than the market may be a factor. If for example, land has a particular value for a particular adjoining owner, this may have an effect on the price which needs to be considered.
Artificial restrictions on price are to be ignored. Accordingly, the imposition of terms and conditions which could theoretically impede its value or for which are capable of being released are ignored.
In the case of shares, it is assumed that there is an available buyer who will have access to all information which he may reasonably require if he was undertaking a market purchase and commissioned a report for the purpose of considering the value of the assets.
In many cases, there would be a ready market for the asset which can be ascertained. In other cases, the asset is unique. The valuation of assets is issue in a range of areas including in particular tax. See the separate sections on the valuation of shares in a private company.
In the case of assets which are coowned, the undivided share which passes is to be valued. In the case of shares, it is recognized to a certain extent that a minority shareholding has inherently less value. A discount of 10 to 20 percent is often allowed. THis may not fully compensate for the practical limitations on the marketability of a minority shareholding.
Businesses and companies may be valued as going concern or on breakup value. The difference between the value of the business as a going concern and the value of its assets generally comprises goodwill. It may also be attributable to other unsaleable assets such as human capital, the value of registered intangibles and receivables. The value of receivables may be less than their face value if there is a risk of non-collection.
Special rules also apply to shares in a public company quoted on a stock exchange. In the case of quoted shares, there will generally be a readily ascertainable market by reference to the relevance stock exchange price. A basis is that commonly used is that provided for in relation to capital gains tax which is lower of the last recorded price on the official list on the relevant date or if more than one half between the loss and highest.
Valuation is more difficult in the case of unquoted shares. A range of factors are taken into account including underlying assets of a business, comparable sales, economic positions, earnings, dividends, etc.
A majority shareholding in a company is usually worth significantly more per share value than a minority holding. The revenue in practice allow discounts in respect of minority holdings and holdings less than 75 percent. In the case of 50 to 75 percent, a 10 to 15 percent discount may be allowed.
A fifty percent shareholding may be allowed a 20 to 30 percent discount. A 25 percent shareholding may be allowed a 35 to 40 percent discount. A 25 percent holding may be allowed a 50 to 70 percent discount. The above were just illustrative and may not be those applicable in particular cases.
Where the company is controlled by the beneficiary and connected parties, it is valued on the basis that shareholder controls the company. Accordingly, shareholdings held by connected relatives, and companies directly or indirectly under his control are aggregated. The holdings of ttustees of settlements of which the beneficiary is a actual or potential beneficiary, is aggregated with that of the beneficiary.
Similarly, companies controlled or indirectly controlled with connected parties are aggregated, shares in private companies following to the above categories which will cover the vast majority of private companies are valued as a proportionate part of the entire shareholding. If the beneficiary and connected and related parties own 100 percent, the benefit is based on the shareholding of all the connected and related parties.
Special rules apply to a private company which is not under the control of five or fewer persons. Connected persons are deemed one for this purpose. A person who is deemed to have control of the company if he or connected parties are entitled to appoint the board of directors and title the 50 percent of dividends and distribution or 50 percent of assets on a winding up or 50 percent nominal interest in the company.
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