The Companies Act prohibits private companies from offering
their shares to the public. Also, many private companies, for
various reasons, have chosen to retain restrictions in their
Articles of Association upon the rights of members to transfer
shares despite the fact this is no longer a requirement of the
Companies Acts. The result is that the actual market for unlisted
securities is, at best, fragmented and in many cases it does not
exist at all.
The manner in which unlisted shares are to be valued is,
therefore, laid down (in some circumstances) by statute.
Chronologically:
Estate Duty - s.7(5) Finance Act 1894
"The principal value of any property shall be estimated to be the price which, in the opinion of the Commissioners, such property would fetch if sold in the open market at the time of the death of the deceased. "
Stamp Duty - s.74 Finance (1909 -10) Act 1910
"(1) Any conveyance or transfer operating as a voluntary disposition inter vivos shall be chargeable with the like Stamp Duty as if it were a conveyance or transfer on sale with the substitution in each case of the value of the property conveyed or transferred for the amount of value of the consideration for the sale....."
"(5) Any conveyance or transfer (not being a disposition made in favour of a purchaser or incumbrancer or other person in good faith and for valuable consideration) shall, for the purposes of this section, be deemed to be a conveyance or transfer operating as a voluntary disposition inter vivos, and (except where marriage is the consideration) the consideration for any conveyance or transfer shall not for this purpose be deemed to be valuable consideration where the Commissioners are of the opinion that by reason of the inadequacy of the sum paid as consideration or other circumstances the conveyance or transfer confers a substantial benefit on the person to whom the property is conveyed or transferred......"
Capital Gains Tax - s.272(1 ) and (2) Taxation of Chargeable Gains Act 1992 (formerly s.44 (1) Finance Act 1965 and s.150 (1) and (2) Capital Gains Tax Act 1979)
".....'market value' in relation to any assets means the price which those assets might reasonably be expected to fetch if sold in the open market."
Capital Transfer Tax and Inheritance Tax - s.160 Inheritance Tax Act 1984 (formerly s.38 Finance Act 1975)
"....the value at any time of any property shall for the purposes of this Act be the price which the property might reasonably be expected to fetch if sold in the open market at that time; but that price shall not be assumed to be reduced on the ground that the whole of the property is to be placed on the market at one and the same time."
Income Tax – s.421 Finance Act 2003
“(1) In this chapter and chapters 2 to 5 ‘market value’ has the same meaning as it has for the purposes of TCGA 1992 by virtue of part 8 of that Act”.
[But see Chapter 109 of this manual SVM109000 regarding ‘money’s worth’]
With the exception of Stamp Duty, the various statutes mentioned
above define the price of unlisted shares or securities for fiscal
purposes as that which would be obtained in the "open market": but
what is this "open market" and how is it defined?
It is established that the actual market for private shares
is necessarily a restricted market which cannot adequately satisfy
the statutory requirements. There is a body of case law, and in
particular a number of Estate Duty cases concerned with the
interpretation of Section 7(5) Finance Act 1894 that may usefully
be examined.
S.74 Finance (1909—1910) Act 1910 does not actually
include the words "open market". It was, however, considered in
Stanyforth and another v CIR [1930] AC 339 where Lord Warrington of
Clyffe agreed with the Commissioners that the value of the property
to be ascertained should be by reference to "market value" and "a
sale in the open market".
Since the Stanyforth case the Solicitor of Inland Revenue
and Revenue Counsel have advised that valuation on the basis laid
down in the Crossman case (see below) is applicable and it is now
settled that Stamp Duty valuations proceed on exactly the same
lines as those for Estate Duty and Capital Gains Tax.
The statutory definition of value for what remains of Stamp
Duty after 26 March 1985 is contained in s.82(2) of the Finance Act
1985 which amends the earlier definition in s.58(7) of the Stamps
Act 1891 (inserted by s.112(3) of the Finance Act 1984). and now
includes the words "open market".
"...that value shall be taken to be the price which the
property might reasonably be expected to fetch on a sale at that
time in the open market."
| Additional Guidance: SVM150000 |
