HMRC internal manual

Inheritance Tax Manual

IHTM25060 - Valuing businesses and partnerships: Business terms

Profit and Loss Account

This shows business income and business expenditure. By comparing one against the other you will see whether the business made a profit or a loss over the period (usually a year).

Balance Sheet

This shows the financial position of the business at a particular moment, usually the end of the accounting year (there is no rule which says when an accounting year must end so, although many businesses run their accounts from 6 April to 5 April with the tax year, they can choose any date they want).

You will usually find that as well as showing the current year’s figures, the balance sheet also shows the figures from the previous year. This enables you to see where the current opening figures came from.

Unlike the profit and loss account, the balance sheet reflects the capital assets of the business. However, the figures shown in the vast majority of cases will be book values and not open market values. For Inheritance Tax the book values will be replaced by open market values.


Goodwill is the worth of the business over and above its tangible value and can include factors such as a strong customer base. It is, therefore, an intangible asset.

Whilst this can be a very valuable asset in a business (except farming and NHS medical practices, because of the nature of those businesses) it is rarely entered in the balance sheet itself. Refer the valuation of goodwill to Shares and Assets Valuation (SAV) (Goodwill).

Capital Account

This is the value of the deceased’s interest in the business representing the difference between the assets and liabilities as shown in the balance sheet. This is the figure you will usually find in the IHT400. It is the starting point only. Any additions or subtractions due to changes in the value of capital assets, to arrive at the open market value, have to be added to or deducted from this figure.

Fixed Assets

These are business assets which are not held for sale - typically the business premises, plant and machinery. The value shown is usually the ‘book value’, i.e. the cost less depreciation (the value of assets other than land are usually written off over a number of years), not an open market one.

Current Assets

Usually included in the balance sheet at cost and can include


cash and bank balances

the value of work in progress.

Current Liabilities

Simply current outstanding debts due from the business in the normal course of trade, e.g. for supplies.

Loan Account

Money lent to or from the business.