Shares and Assets Valuation

An introduction

Contents

Introduction

Shares and Assets Valuation (SAV) is a specialist area within HM Revenue & Customs (HMRC) Charities Assets and Residence based in Nottingham. When the open market value of any asset, except for UK land or property, is relevant to your tax affairs, your Tax Office may instruct SAV to consider and, if necessary, negotiate that value with you. Depending on the circumstances, you may be able to ask SAV to consider the value once the transaction has occurred and before you file your return, using the Post Transaction Valuation Check (PTVC) service.

This page provides some guidance on the points you should consider when preparing/submitting a valuation of some of the main assets SAV considers. It may not cover every point that interests you. If you have any queries, advisers at the Helpline detailed below will be pleased to assist where possible.

HMRC Charities Assets and Residence
Shares and Assets Valuation
Ferrers House
PO Box 38
Castle Meadow Road
Nottingham
NG2 1BB

DX 701201 Nottingham 4

Helpline: 0115 974 2222 (Open from 9.00 am to 5.00 pm Monday to Friday)
Fax: 0115 974 2197

NB. The Helpline cannot give advice on specific tax matters not relating to valuation issues.

For enquiries relating to Capital Gains Tax and Income Tax (ITEPA), please contact your Inspector of Taxes.

For Stamp Duty and Inheritance Tax, try the following helpline telephone numbers:

  • Stamp Duty (for example, Stock Transfer forms). The Stamp Duty Helpline telephone number is 0845 603 0135
  • Inheritance Tax. The Inheritance Tax and Probate helpline telephone number is 0845 302 0900

The basis of valuation for tax purposes

SAV undertakes the valuation of a wide range of asset for all tax purposes. As there is no active market for most of the assets considered by SAV, decisions from the Courts over the years have provided guidance.

When carrying out valuations for tax purposes it is important that they are carried out on the correct basis. Under Self Assessment procedures taxpayers are responsible for either calculating the appropriate amount of tax due or, in the case of individuals, for providing the appropriate figures to enable HMRC to calculate it on their behalf. If a valuation is not provided on the correct basis a taxpayer's tax return may be challenged by HMRC. If following any challenge the valuation has to be adjusted the taxpayer may be faced with having to pay not only interest on any additional tax payable but penalties as well.

What is the correct basis of valuation for tax purposes?

The correct basis of valuation for tax purposes is the 'market value' as defined in the relevant statute. The definition of market value for Capital Gains Tax can be found in Section 272 of the Taxation of Chargeable Gains Act 1992, for Inheritance Tax it can be found in Section 160 of the Inheritance Tax Act 1984 and for Stamp Duty Land Tax in Section 118 of the Finance Act 2003.

These definitions are all very similar and broadly define market value as:

'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 grounds that the whole property is to be placed on the market at one and the same time.'

The current statutory definitions are similar to those used in earlier Acts and over the years the above definition has been examined by the courts in numerous cases. The case law was usefully summarised by the Court of Appeal in the case of IRC v Gray (Executor of Lady Fox (Deceased) in 1994. The case law has established some important assumptions that must be made when arriving at the market value in accordance with the above definition.

What are the assumptions derived from case law?

Case law has established the following assumptions:

  • the sale is a hypothetical sale
  • the vendor is a hypothetical, prudent and willing party to the transaction
  • the purchaser is a hypothetical, prudent and willing party to the transaction (unless considered a 'special purchaser')
  • for the purposes of the hypothetical sale, the vendor would divide the property to be valued into whatever natural lots would achieve the best overall price (this is the principle of 'prudent lotting')
  • all preliminary arrangements necessary for the sale to take place have been carried out prior to the valuation date
  • the property is offered for sale on the open market by whichever method of sale will achieve the best price
  • there is adequate publicity or advertisement before the sale takes place so that it is brought to the attention of all likely purchasers
  • the valuation should reflect the bid of any 'special purchaser' in the market (provided they are willing and able to purchase)

What is the date of valuation?

In Capital Gains Tax cases the valuation date may be the 31 March 1982 (when required by Section 35(2) of the Taxation of Chargeable Gains Act 1992), or, when it is necessary to assess the market value at the date of actual acquisition or disposal, the date a binding contract was entered into.

Guidance

SAV does not undertake the valuations of UK land and buildings for tax purposes. The Valuation Office Agency (opens new window) deals with these valuations.

The links below provide guidance on the points you should address and the evidence you should provide when preparing/submitting a valuation for some of the different assets SAV considers. Providing this information should increase the chance of your value being accepted or, if this is not possible, reduce the length of time it takes to agree a value with you.

SAV is happy to deal with you directly on all valuation matters. However, valuation is a specialised subject and can involve highly complex issues, so you may wish to consider appointing a professional adviser, such as, an accountant, solicitor or valuation expert to represent you. If you do, it will gladly liaise with them too.

Unquoted shares

For any valuation of unquoted shares, whether registered in the UK or a foreign country, you should consider/provide the following information:

  • The company's performance and financial status as shown in its accounts for, say, the last three years before the date of valuation, and any other information normally available to its shareholders. In the case of foreign companies you will need to provide copies of the accounts for the three years before the date of valuation.
  • The size of the shareholding, and shareholders' rights. If, for example, the holding is one that would give control of a company, it may be necessary to agree the value of all the company's assets and to have much more information about the company's performance and prospects than is in the published accounts.
  • The company's dividend policy.
  • Appropriate yields and price earnings ratios of comparable companies or sectors.
  • The commercial and economic background at the valuation date.
  • A full explanation as to how the suggested value has been calculated, including:
    • the valuation approach adopted, for example Earnings, Assets, Dividend Yield or industry specific valuation method
    • any assumptions or adjustments made
    • all the supporting evidence used.
  • Any other relevant factors.

Does the percentage size of the asset held affect its valuation?

The valuation must reflect the extent to which a potential buyer of the asset can control, influence and derive enjoyment from the asset. Usually, if the degree of control of the asset is less than 100 per cent, then the value of the percentage share of the asset will be less than a pro-rata proportion of the asset's total value.

In terms of unquoted shares, there are many degrees of control, usually determined by the voting power of a particular block of shares. These range from full control, including power to liquidate the company, to a small or non-existent influence over the company's affairs of a minority shareholding.

The standard of information used in a valuation is also linked to the size and influence of the shareholding in question. The greater the influence a shareholding has then more detailed and sensitive information about the company can be used in addition to the company's accounts.

Negligible value shares and securities

You may be able to offset any loss arising against income tax or Capital Gains Tax as long as you meet all of the relevant conditions. To make a claim, in the first instance you must contact your Tax Office who may ask SAV to investigate the situation. You can make a claim for 'negligible value' by making an entry on your tax return or by letter. Contact your local HMRC office for further information or see Help Sheet IR286 at the following link: Help Sheet IR286 (PDF 39K)

If the company is in liquidation or receivership you should provide the following:

  • a statement of affairs relating to the company and any subsidiaries
  • a letter from the liquidator or receiver showing whether any return will be made to the shareholders
  • details of how this decision was reached, for example, a balance sheet showing significantly more debts than assets
  • any evidence that no recovery or rescue of the company is likely, for example, a statement that the company has ceased trading

If the company is not in liquidation or receivership, then comprehensive information is needed to show that the shares or securities have become of negligible value. The burden of proof for the claim lies with you.

Is there a rule of thumb test to define 'negligible'?

No. The test is an objective one. A rule of thumb percentage of either the nominal value of the securities or of the price for which you originally acquired them may not work. The securities could pass such a percentage test but still have significant value. SAV consider each case on its own merits.

Assets must have become of negligible value

To qualify, the asset must have become of negligible value, it may therefore be necessary to consider the value of the shares/assets when they were acquired to ensure that they were not of negligible value when they were acquired. You should provide evidence to show that the assets had value when they were acquired.

Negligible value claims in respect of companies that were formerly quoted

SAV publish a list of shares and securities in companies that were formerly quoted on the London Stock Exchange that have been previously accepted as being of negligible value. However, even if a company appears on the Negligible Value List then you still have to submit your claim to your Tax Office as above. The list is available at the following link: Negligible Value List

There is no similar list published for either unquoted companies, companies formerly quoted upon the Alternative Investment Market and PLUS Market or any non-UK companies.

Goodwill

Goodwill is an asset within the meaning of TCGA92/S21(1). The term 'goodwill' is however not defined for the purposes of the Capital Gains legislation in TCGA 92. The leading authority on its meaning is found in IRC v Muller & Co Margarine (1901) AC217 where in answer to the question 'What is goodwill?' Lord Macnaghten said 'It is a thing very easy to describe, very difficult to define. It is the benefit and advantage of the good name, reputation and connection of a business. It is the attractive force which brings in custom. It is the one thing which distinguishes an old established business from a new business at its first start'.

The decision of the Special Commissioners in Balloon Promotions Ltd v Wilson SpC524(2006)STC(SCD0167 provides authority for the fact that for Capital Gains purposes goodwill should be construed in accordance with legal rather than accountancy principles. A distinction must therefore be drawn between 'goodwill' for Capital Gains Tax purposes and 'goodwill' within Sch29 FA 2002 where accountancy principles apply and 'goodwill' is simply the difference between the overall worth of a business when it changes hands and the value of its identifiable (including intangible) assets.

When valuing the goodwill of a business you should consider and provide details of:

  • The full sale/purchase documentation relating to the transfer of both tangible and intangible assets.
  • The valuation approach adopted for example, capitalization of profits, super profits or trade specific methodology, together with the computation.
  • The activities of the business and the role of the proprietors within it.
  • The business' performance and financial status as shown in its accounts for the last three years before the date of valuation and any other relevant financial information available.
  • Appropriate yield and multiples of comparable companies or sectors.
  • The commercial and economic background at the valuation date.
  • How the personal goodwill of the proprietor have been reflected in the valuation.
  • All the supporting evidence used.
  • Any other relevant factor.
  • Goodwill within the so called 'leisure sector' for example, Hotels, Nursing Homes, Public Houses etc. will be considered by SAV in conjunction with RICS qualified valuers within the VOA. This is a complex area and the latest guidance on this subject can be found at Goodwill in Trade Related Properties Background Note

Quoted shares

SAV may be asked to consider the value of quoted shares where:

You should provide your best estimate of the value of the stock together with supporting evidence and if applicable the exchange rate used.

Intangible Assets

Intangible assets are non-financial fixed assets that do not have a physical substance but are identifiable and controlled through custody or legal rights. They include:

  • Brands
  • Trademarks
  • Intellectual property
  • Publishing rights
  • Know how
  • Franchises, Dealerships and Licenses

Identification of intangible assets can be very difficult and involve a range of complicated issues, especially in respect of intellectual property. You may want to seek specialist guidance if the circumstances of your case are complex.

Intangible assets are often valued either on a multiple of profit/income stream or using a discounted cash flow. When submitting a valuation of an intangible asset you should consider and provide details of:

  • a full description of the asset and the taxpayers rights over the asset
  • how the profit/income stream and/or any projections were arrived at and any adjustment you have made
  • how you arrived at your profit/incomes multiple and/or discount rate

Chattels

SAV may be asked to consider the valuation of Chattels including

  • works of art
  • antiques
  • memorabilia
  • classic cars
  • number plates
  • wine and spirits
  • bullion

If the valuation is for Inheritance Tax purposes, you will need to complete Form D10 which is a supplementary schedule attached to the IHT200. This will guide you through the information you need to provide.

For all valuations you need to consider/provide, as appropriate:

  • A full description of the items.
  • Details of your proposed open market value for individual or specific groups of items.
  • An explanation of how you arrived at that value (where a professional valuation is not available) and why, if appropriate, a low or 'nil' value has been returned.
  • A copy of any professional valuation you have obtained, this should include an explanation of how the value was arrived at, it is not sufficient to simply say that it has been prepared by an expert.
  • Details of any sales proposed.
  • If any items have been sold, you will need to provide details of the gross sales proceeds. If the sale of any item has been for less than market value you will need to provide the full open market value.

Bloodstock and livestock

SAV may be asked to consider the valuation of bloodstock, primarily race horses, and livestock herds for tax purposes. When preparing/submitting a valuation of bloodstock and livestock you should consider/provide details of:

Bloodstock:

  • The name of the horse.
  • Or the horse's lineage, that is, dam and sire.
  • Details of how you arrived at your proposed value.

Livestock:

  • The breed, sex and age of the cattle.
  • In the case of dairy herds, the calving pattern.
  • Details of how you arrived at your proposed value.

Lloyds underwriting interests

The value of a Name's Lloyd's underwriting interest normally qualifies for Business Property Relief at 100 per cent under IHTA 84/S105(1)(a) to the extent that the Funds at Lloyds (FAL) are commensurate with the amount of underwriting business that is being written by the Name. As a rule of thumb, Business Property Relief is not restricted as long as the value of the Funds at Lloyds assets are not substantially greater than the minimum Funds at Lloyds requirement. When preparing/submitting a valuation in respect of a Name's underwriting interest, you need to consider/provide details of:

  • the total Funds at Lloyds, excluding any dividends or interest arising from the assets as due to the fact that they are mandated directly to the individual member, they do not form part of the underwriting interest,
  • allocated premium limit for the last two years
  • the profits/losses arising on the open years
  • any accounts in run-off
  • any Estate Protection Plan or Exeat Policy held
  • any proceeds from the sale of syndicate capacity at auction

Foreign land/property

SAV may be asked to consider the value of foreign property and land, including timeshares. When preparing/submitting a valuation of foreign land/property, you will need to consider/provide as appropriate:

  • The full address of the property.
  • A full description of the property to include the details of the number and type of rooms; the approximate floor area, any additional facilities, for example, swimming pool, tennis court etc; a photograph of the property if this is available; the approximate area of any land owned and the use to which it is put; and briefly, the surrounding area and its amenities.
  • If the property is other than freehold (or its local equivalent) full details, for example, details of lease, or similar.
  • If the property was let at the date of valuation, the principal terms of the tenancy; for example, rent payable, provisions for rent revision, duration of tenancy etc.
  • By whom has the value been estimated? If a professional valuation has been obtained, please forward a copy.
  • Does the value offered represent the statutory open market value? If not, please state on what basis it has been calculated. For example, in Spain the value may be the 'valor cadastral' which is generally lower than open market value.
  • How and when was the property acquired? If by purchase, when was it acquired? What was the purchase price?
  • Is it necessary to agree a value with the Foreign Tax Authorities? If so, please state the value agreed where known.
  • Is an open market sale of the property contemplated?
  • If the value is in the local currency, what exchange rate have you used?

PTVCs

What are post-transaction valuation checks?

Individuals and trustees can have the value of unquoted shares and goodwill checked by SAV if they wish. But, SAV can only do this:

  • after disposals relevant to Capital Gains Tax
  • before the date you have to complete your Self Assessment tax return

This is called a post-transaction valuation check. If you wish to do this, you should complete form CG34 (which you can get from any HMRC office or Enquiry Centre) and send it back to your own Tax Office. It will then instruct SAV.

SAV will check the details on your CG34 and let you know if it:

  • accepts the value you have provided
  • requires further information from you
  • suggests an alternative value to negotiate with you

SAV's valuer will try to complete the valuation process quickly. But, sometimes it will not be possible to agree values before you have to send in your tax return, which must be done by the due date, whether or not SAV have completed the valuation check.
You should enter the amount of the gain (or loss) that you expect SAV to agree from the valuation on your tax return.

Your Tax Office may have to give you formal notice that it is carrying out an enquiry, if:

  • SAV have not completed a post-transaction valuation check, or
  • have not agreed the values within 12 months after the filing date of the tax return

Appeals/Tribunals

What happens if I cannot reach an agreement with Shares and Assets Valuation?

SAV settle the vast majority of valuations referred by negotiation but if it is not possible to reach a negotiated agreement it will be necessary to arrange an appeal hearing before the Tax Tribunals to resolve the matter.

The Tax Tribunals system was introduced on 1 April 2009 and further details are available on the Finance and Tax Tribunals website

Useful links

You can get more detailed information about the work of Shares and Assets Valuation in the SAV Manual that is available at the following link:

SAV annually meet with external practitioners at the Share and Assets Valuation Fiscal Forum in order to exchange views and opinions on technical and practical matters. The Forum provides an opportunity to clarify current practice and to update practitioners on procedural matters. There is a separate forum for matters relating to chattels.

The minutes of these forums can be found at the following links:

Further information about the underlying taxes can be found at: