Inheritance Tax and Valuation

Abstract

It has long been known in the literature how to include income taxes in the valuation of companies. These taxes can be neutral and therefore do not influence the company value, provided certain conditions are met; essentially, a firm’s cash flows have to be taxed the same way as those of a financial investment, which requires the use of economic depreciation. In this paper, we clarify how to value a company when its owner becomes liable for inheritance tax. Here, too, this type of tax is irrelevant when all assets are equally taxed. However, if some assets, e.g. business assets, are treated preferentially, which is the case in most European jurisdictions, the company value rises. We show that a considerable increase can be observed within realistic parameters for European countries.