OT30330 - Capital Gains

Valuation of Oil Assets (including shares). Methodology. Overview.

Valuation is not a precise science, and a sensible, pragmatic application of the principles and consideration of the facts is required.

The starting point is the price which the assets might reasonably be expected to fetch on a sale in the open market - TCGA92/S272 (1). The statutory valuation hypothesis requires a hypothetical purchaser and a hypothetical vendor, but it does not require the assumption of a hypothetical open market. The asset is assumed sold in the open market prevailing at the date of the valuation.

Arguably, therefore, the statutory open market value concept, like the real world open market concept, is a purchaser orientated one i.e. the open market value reflects what the purchaser is prepared to pay rather than only what the vendor is willing to accept, and the price the oil asset is assumed to fetch on the statutory open market can reasonably be said to be an estimate of the cash price of the asset at that date i.e. the money in cash that a purchaser would pay at that date.

Hindsight is not acceptable in arriving at the open market price, but subsequent events may help identify information available at the valuation date, but no longer available at the time of valuation.

The possible presence of a special purchaser must be considered when appropriate, but the issue is what effect this would have on the price. The expected general effect of a special purchaser would be to push up the value, but only if the existence of special purchaser could reasonably be known at the time by other persons.

Where the existence of a special purchaser is known it is reasonable to assume a value between that of the ordinary market price and the price the special purchaser would pay, but which would still give the purchaser the prospect of a reasonable return on his investment. The reasoning is based on the idea that a purchaser would buy in order to sell on to the special purchaser. However, for North Sea deals it should be presumed that the DTI would not sanction an asset acquisition which was only obtained in order to make a profit on resale, and it is reasonable to make a similar assumption in the case of non-UK oil assets.

For the North Sea, we generally consider that there is no special purchaser. If the taxpayer contends that one exists it is up to him to identify it. For non-UK oil assets a similar assumption is applied until and unless it is demonstrated to the contrary.

The tax provisions applying at the date of valuation should be used, although prospective legislation, if known, might be a factor in determining the price the purchaser would be prepared to pay at the date of valuation.