A share deal saves transfer tax but inherits an old tax base; the price turns on what that base costs over the buyer's hold, not on its face value.
Price the latent tax at its present value, not at its face, and net it against the transfer tax the share deal saves. On an illustrative property worth 60,000,000 inside an SPV with a 30,000,000 tax base, the nominal latent tax is 7,500,000, but inherited over a ten-year hold it costs the buyer 4,143,770 today, 55 per cent of face. Set against 3,900,000 of transfer tax avoided, the buyer can pay 59,756,230 for the property in a share deal, almost the asset deal price, while the seller needs only 52,500,000.
Worked in full in Real Estate Transaction Due Diligence by Julian R. Sterling, with every figure reproduced in a free workbook.See the book on Amazon →
In an asset deal the buyer pays transfer tax and gets a fresh tax base equal to what it paid. In a share deal it buys the company that owns the building, usually saves the transfer tax, and inherits the company's old, low tax base. That base means more tax when the building is eventually sold and less tax depreciation in the meantime. The diligence question is how much of the price that inheritance is worth.
| Input | Value |
|---|---|
| Agreed property value | 60,000,000 |
| Transfer tax on an asset deal (buyer pays) | 6.5% |
| Tax base of the property in the SPV | 30,000,000 |
| Tax rate on gains and income | 25% |
| Depreciable building share, rate | 70%, 2% a year |
| Buyer's hold, discount rate | 10 years, 8% |
The rents and the eventual sale price are the same whichever route the buyer takes, so they cancel. Only three things differ: the transfer tax now, the depreciation each year, and the tax on exit.
The buyer pays 60,000,000 plus 3,900,000 of transfer tax, 63,900,000 in all, and that becomes its tax base. It depreciates 70 per cent of 60,000,000 at 2 per cent, 840,000 a year.
The SPV's base is 30,000,000, so its depreciation is 420,000 a year. The buyer loses 420,000 of deductions a year, worth 105,000 of tax, for ten years: a present value of 704,559 at 8 per cent.
On exit, after ten years of depreciation, the asset deal base would be 55,500,000 and the share deal base 25,800,000. Selling the building at the same price then costs 7,425,000 more tax in the share deal, worth 3,439,212 today.
Maximum share deal value = asset value + transfer tax saved − PV(lost depreciation relief) − PV(extra exit tax)
60,000,000 + 3,900,000 − 704,559 − 3,439,212 = 59,756,230. In Excel: =B1+B2-PV(B3,B4,-B5)-B6/(1+B3)^B4, with the extra exit tax in B6.
The buyer's tax cost of inheriting the base is 4,143,770, which is 55 per cent of the nominal 7,500,000. That is close to the 50 per cent discount often quoted as a market convention, but it is a result, not a rule: it moves with the hold, the rate and the base.
Selling the building itself, the SPV pays 25 per cent on a 30,000,000 gain, 7,500,000, leaving 52,500,000. Where the seller can sell shares free of tax (some participation exemptions allow it), any share price above that improves on an asset sale. The negotiation therefore sits between 52,500,000 and 59,756,230, a zone of 7,256,230.
| Item | Buyer's maximum | 50% convention |
|---|---|---|
| Property value used | 59,756,230 | 56,250,000 |
| Less SPV debt | −35,000,000 | −35,000,000 |
| Plus cash | 1,200,000 | 1,200,000 |
| Other net liabilities | −400,000 | −400,000 |
| Equity price | 25,556,230 | 22,050,000 |
At the 50 per cent convention, 56,250,000, the buyer keeps 3,506,230 against its maximum and the seller gains 3,750,000 against an asset sale. Both are better off than in an asset deal, which is why share deals dominate where the tax rules allow them. The equity bridge itself, and its adjustments at completion, are where the completion mechanism matters, as in locked box versus completion accounts.
| Hold (years) | PV of the tax cost | Maximum value | Discount to 60,000,000 |
|---|---|---|---|
| 5 | 5,829,871 | 58,070,129 | 1,929,871 |
| 10 | 4,143,770 | 59,756,230 | 243,770 |
| 15 | 3,073,913 | 60,826,087 | −826,087 |
| 25 | 1,975,056 | 61,924,944 | −1,924,944 |
A long-term holder can pay more than the asset value for the shares, because the latent tax is distant and the transfer tax saving is immediate. A five-year buyer cannot. Two bidders with the same view of the building can therefore rationally bid 3,854,815 apart in a share deal, simply because one plans to sell sooner.
| SPV tax base | Nominal latent tax | Maximum value | Discount to 60,000,000 |
|---|---|---|---|
| 15,000,000 | 11,250,000 | 57,910,152 | 2,089,848 |
| 30,000,000 | 7,500,000 | 59,756,230 | 243,770 |
| 45,000,000 | 3,750,000 | 61,602,308 | −1,602,308 |
| 60,000,000 | 0 | 63,448,386 | −3,448,386 |
All rates and figures are illustrative and this is not tax advice. The treatment of share disposals, depreciation and transfer taxes differs by country and by structure.
The financial diligence that feeds this, from tax base to equity bridge, is set out alongside the free workbook for this book.
Practice often splits the nominal latent tax, with 50 per cent a common starting point, but the economic answer depends on the buyer's hold and discount rate. In the illustrative case the present value of the 7,500,000 latent tax, including lost depreciation, is 4,143,770 over ten years at 8 per cent, 55 per cent of face.
Because a share sale leaves the SPV's latent gain untaxed, and where a participation exemption covers the seller's gain on the shares, the seller pays no tax at all. Selling the building, the SPV in the illustrative case pays 7,500,000 of tax and keeps 52,500,000; selling the shares at the 50 per cent convention values the property at 56,250,000, 3,750,000 more.
Start from the agreed property value after the latent tax adjustment, deduct the SPV's debt and other net liabilities and add its cash. In the illustrative case 56,250,000 less 35,000,000 of debt, plus 1,200,000 of cash, less 400,000 of other net liabilities gives an equity price of 22,050,000.
This article is one calculation from Real Estate Transaction Due Diligence. The book takes the same case from first principles to the decision, chapter by chapter, and every figure it prints is a live formula in the free companion workbooks.
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