The FHM Minute

The rate will depend on how cash is extracted. If extraction is taken as a dividend, then the maximum rate is 39.35%. If taken as salary, then the maximum rate is 45%. If taken by an overdrawn director's loan account, the company will incur s455 tax on the overdrawn balance at 35.75%.

However, if the extraction can be structured as capital, then the capital gains tax rates will apply (a maximum rate of 24%).

Where can liquidity be derived from?

- Cash
- Disposal of surplus assets
- Sale and leaseback of business premises
- Borrowing against property or other assets

There could also be a capital extraction, other than cash, by a distribution of assets or restructuring the company

A quasi-partnership is a company that is legally incorporated but, in substance, operates much like a partnership.

Key indicators of a quasi-partnership are:
- Personal relationship of mutual trust and confidence
- An understanding that all (or certain) shareholders will participate in management
- Restrictions on transferring shares
- Small number of shareholders
- Informal arrangements

It is ultimately for the Court to determine whether a company is a quasi-partnership.  In a quasi-partnership a minority discount is not normally applied. 

For disposals after 6 April 2023, transfers between spouses made in accordance with a formal agreement or court order to end a marriage are made at nil gain, nil loss.

For disposals before 6 April 2023, or where the marriage has already been formally ended, the matter is more complicated and the specifics need to be checked. 

Latent tax is a potential tax liability that exists but is not immediately payable. For example, in family law cases, we often calculate the latent tax on a property or investment that would arise if an asset is sold at its current market value. Two assets of the same market value may have very different amounts of latent tax.

Latent or deferred tax is also relevant in valuing property investment companies. The deferred tax reduces a net asset valuation. It is a matter of negotiation as to whether the full deferred tax is deducted in the valuation or a percentage (typically 50%). 

No, typically a trading business is valued by applying a multiple to the weighted adjusted EBITDA. However, we will also consider the valuation based on adjusted net assets. For example, if the commercial return is low or in certain cases for "singleton" companies, we may value based on adjusted net assets. 

Personal goodwill is the goodwill attributing to the skills, personality, personal reputation and connections of the proprietor. If a business cannot continue or be sold without the proprietor's continue involvement, it is likely that any goodwill is personal. Personal goodwill is typically discounted (fully or partially) in valuing a business.

In the case of CG v SG, it was decided the company should be considered as a "singleton" company. The husband earned ~90% of the income and drew ~95% of the profits. The judge determined the value of the company should be based on net assets and not EBITDA.

The impact could be substantial. For example, the valuation of a hairdressing business, Goldilocks Ltd, based on net assets might be, say, £10,000. For a valuation based on earnings, the equity value might be, say, £100,000. However, if it is determined to be a personal services company the valuation will be based only on net assets, namely £10,000.

If the business has a corporate brand and employees, it is likely to have some corporate goodwill.

In simplistic terms, corporate goodwill is the difference between the net assets of the company and the company market valuation based on its earnings. 

EBITDA is the abbreviation of Earnings Before Interest Tax Depreciation and Amortisation.

EBITDA is the measure of profits used when valuing a company based on its earnings. For valuations the historical EBITDA is adjusted for any exceptional or one-off items such as exceptional bad debts or legal fees. An adjustment is also made to deduct a commercial salary for the business owner(s).

When valuing a company, the valuer will typically look at a number of years historical adjusted EBITDAs and apply some form of weighting to arrive at an estimate of future maintainable earnings for the company, the "weighted average adjusted EBITDA".

Unfortunately, yes, a director or business owner can manipulate profits. Most private companies are not subject to an external audit. The company directors are responsible for the preparation of the accounts and take the decisions in terms of the day-to-day and year-end accounting. The business will typically receive guidance from an external accountant but this gives limited assurance that the accounts are free from material misstatements.

Typical areas that may be manipulated include income recognition (possibly deferring income recognition), sales not recorded in the company accounts, inclusion of provisions or creditors that are not substantiated and private expenses in the profit and loss account.

A shadow expert can be instructed at the point of disclosure to assist in drafting questions and possibly to give an indicative view of the valuation of any business interests. The shadow expert can give an opinion on whether a Single Joint Expert ("SJE") should be considered.

A shadow expert can be engaged to review the SJE report and assist on drafting questions. The shadow expert may also assist the instruting solicitor and counsel prepare for any hearing.

A shadow expert can also assist in exploring scenarios such as calculations such as in respect of a "Springboard" or tax calculations.

A shadow expert may prepare a report as party expert if a successful Daniels & Walker application has been made.