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Offline Liz  
#1 Posted : 25 September 2014 10:42:02(UTC)
Liz

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It has been a little while since had to agree a Share Valuation with SVD (Share Valuation Division) as it was back then.

Are there any recent issues regarding HMRC practice in agreeing share values that I should be aware of.

Useful pointers, hints or tips from other tax professionals in this area welcome...

Thx

Liz
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Offline TaxGuru  
#2 Posted : 25 September 2014 10:54:01(UTC)
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Hi Liz

Good to see you have joined the forum. the more tax professionals that join the forum the more useful it will become and could prove to be a handy resource for UK tax professionals to share info and network.

Here are two links you may find useful for guidance on HMRC current approach to share valuation:

HMRC Website link (no doubt will be moving over to the gov.uk website in time)

http://www.hmrc.gov.uk/shareschemes/shares-valuation.htm

And HMRC Shares and assets Valuation Manual

http://www.hmrc.gov.uk/manuals/svmanualnew/Index.htm

SVD is now called SAV (HMRC Shares and Assets Valuation)

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

Hope that gives you a few pointers to HMRC current commentary and approach to share valuation

TG


Offline Liz  
#3 Posted : 25 September 2014 11:09:08(UTC)
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Hey TG that was a quick reply!

Great links thanks...

One question I have is...

HMRC used to be very reluctant to allow discounts in values for "contingent tax" i.e. potential, likely CT liability on a sale of assets within the company being valued.

I found that HMRC would allow 5% contingent tax deduction in share valuation previously (a few years back since my last one but done quite a few SV negotiations with HMRC over the last 20 years or so) and have agreed 15% in some cases.

HMRC's starting point has nearly always been that it is not deductible but usually agree in the negotiations.

Any comments or experience on the "contingent tax" is aspect?

Thx Liz
Offline TaxGuru  
#4 Posted : 25 September 2014 11:17:31(UTC)
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Hi Liz

Interestingly HMRC's manuals used to say the following:

Control Shareholdings (50+% to 100%)

Many unquoted property companies are vehicles for holding property by proxy. Many are merely "money box" companies which hold small portfolios of residential properties or commercial property left in a family company on cessation of trading activities. Such vehicles are completely different from most quoted property companies and certainly the FTASI constituents. (Few quoted companies invest in residential property.)

Valuations of control holdings in "typical" unquoted property investment companies should not present any particular difficulties to the Valuer since a reference to the District Valuer is usually necessary in such cases. The capital values agreed by the District Valuer should reflect the present and future income streams, and the property yields adopted by the District Valuer should reflect the current market value and growth prospects for the type of property held.

For a control holding any discount for lack of management control is inappropriate. The valuation risk is also removed in practical terms, if the properties are valued by the District Valuer. The only remaining factor for discount purposes is the discount for contingent tax. It is preferable to deduct an allowance for contingent tax, calculated by reference to the particular circumstances of the company, from the revised net asset value. The resulting net asset value can then be discounted, as appropriate, for lack of absolute control.

The following levels of discount are suggested after deducting the allowance for contingent tax.

Size Of Holding Discount
75% - 100% NIL - 5%
50% + to 74.9% 10% - 15%

(See SVM18090 for further comments on contingent tax)




http://webarchive.nation...ls/svmanual/svm18060.htm

although the old SV manuals are now part of the National Archive.

Not seen any mention of it in the new SV manual.

TG

Offline BlueSky  
#5 Posted : 25 September 2014 11:47:46(UTC)
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"Contingent tax" discounts often difficult to agree with HMRC but in my experience if overall valuation basis is well present and HMRC can see you know something reasonable about the principles a percentage discount can be agreed with HRMC although usually around the 5% to 10% mark.

Interesting when HMRC refer to the "Statutory Open Market" test in their manuals at

http://www.hmrc.gov.uk/manuals/svmanualnew/svm113040.htm

You will not that their own manuals state:

"Clearly however the shares cannot be worth as much as shares which may be freely sold."

I have also often found staff at HMRC SAV (some seem very inexperienced and simplistic in their approach) initially refute a discount for "lack of marketability" for private unquoted shares. Using arguments such as "must assume "statutory open market" test.

However HMRC's own manuals in the link refer to it as quoted above.

I my view clearly private company shares usually need some level of discount for lack of or a difficulty in selling or marketing private (unquoted) shares for sale i.e. not easy to sell and not in a quoted market selling environment.

As remember any purchaser I the real world (where HMRC don't live) would be very likely to discount private company shares as they too would have the same limited or likely smaller market conditions if they subsequently want to sell their shares on.

It is also not usually easy to sell private shares quickly like you can quoted shares. This in reality affects price paid for private unquoted shares and in the real world private shares often involve marketing costs to sell and often high marketing agent fees.

This are often hard points to get HMRC to take on board in agreeing private company share values but I think are part of a realistic argument.
Offline Mike  
#6 Posted : 25 September 2014 13:32:55(UTC)
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Thanks: 2 times
This is HMRC's guidance on valuing Unquoted shares:

"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.
"

and

"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.
"

Helpful? Not really.

Although our tax system in the UK is very complex with a MASSIVE responsibility on "Self Assessment" taxpayers to get their returns right, it never ceases to amaze me the low, poor and ambiguous level of help and advice HMRC give on complex issues, such as share valuation.

That is probably why most staff as HMRC's SAV would give you a different comment or answer in negotiations.

One even recently said ultimately is it just a "horse trade" or haggle. His bluntness was impressive if not somewhat shocking!

Mike


Offline TaxGuru  
#7 Posted : 25 September 2014 13:46:11(UTC)
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Liz

"Discounts" are often a problem area when valuing unquoted shares for tax purposes and any subsequent negotiations with HMRC who are often very not very helpful (or well trained) in this area.

S Patrick Erdal v HMRC (TC00964) should be read by every tax adviser and accountant and minority holding shareholder of an unquoted company.

The Erdal case was brought to decide the March 1982 valuation of shares so held.

However in so doing the Tribunal confirmed a list of principles and method of calculation.

For example on the issue of "discounts", a tricky area of valuations when valuing unquoted shares the Erdal ruling refers to this as follows:

Discount

58. In Caton a discount of 50-60% was applied to a minority shareholding amounting to 14.02% of the total issued share capital of a company which was successful and profitable. However in that case the valuation proceeded on the basis firstly that a sale of the company would not take place and secondly that it would and the resulting figure was a compromise between the two valuations. The expert evidence on discount in that case was quite wide ranging. In Cash & Carry a discount of 55% was applied to a minority shareholding of 24%. The Tribunal assumed that all the information available to the directors was available to the hypothetical purchase (at page 51). No dividends had been paid and were unlikely to be paid; its future did not look rosy; the taxpayer was the driving force behind the company and if he left the company would be less profitable at least in the short term. In both these cases the relevant statutory provision required the same assumption to be made about the availability of information to a prospective purchaser as applies in this appeal.

59. We do not consider that it would be worthwhile or appropriate to trawl the cases comparing discounts in share valuation cases. Each case must depend on its own particular facts and circumstances; these circumstances would then have to be compared with the company in question and appropriate adjustments made none of which could be carried out scientifically. The range seems to be between 25% and 75%. While we acknowledge that as a private company the shareholding is less marketable than quoted shares and that, as with most private companies there are restrictions in the Company’s Articles of Association on the transmission of shares, the quality and underlying substance of the shareholding and the prospects of the Company was such that we consider that some modification of the average discount of 50% is reasonable and appropriate in the circumstances of this appeal. [A prudent purchaser is always interested in the future prospects of the company (Caton page 52)]. Here the prospects of the Company were indeed rosy at the valuation date. We recognise that this factor has already been taken into account in part in the price to earnings ratio. However, we are of the view that recognition of this factor to its full extent can be given by reflecting it in part in assessing marketability. In our view, the facts demonstrate that the Company is likely to be less unmarketable to a small extent than the average private limited company if such a company exists. We therefore modify Ms Hennessey’s figure of 50% and apply a discount of 40%. We do not see this as double counting but simply as part of the method of reaching what we assess as the proper open market value of the shares as at 31 March 1982 for the purposes of the statutory provisions referred to at paragraph 6 above.
"

In the above you can see "The range seems to be between 25% and 75%".

Great... what a clear tax system we have...

TG

Offline TaxGuru  
#8 Posted : 25 September 2014 13:59:29(UTC)
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Liz,

On the issue of discounts for Marketability in the Erdal case Erdal "initially proposed a discount of 25% in relation to marketability and other factors..".

The case is titled:

"Capital Gains Tax; share valuation; private limited company; price to earnings ratio; discount for lack of marketability, dividend, and re-sale; Taxation of Capital Gains Act 1992 ss35, 272, 273, 275."

The summary of the valuation ruling includes:

Hennessey Valuation Tribunal Valuation
Pre-Tax Profit £950,000 £1,400,000
Less Preference Dividend £13,000 £13,000
Profit Post Preference Dividend £937,000 £1,387,000
Price/Earnings Ratio 12.6 14
Market Capitalisation £11,800,000 £19,400,000
Issued Shares 1982 – 4,800,000 4,800,000
Ordinary 1,440,000
A Ordinary 3,360,000
4,800,000
Share Value £2.46 £4.04
Less Discount 50% 40%
Discounted Value of each  share £1.23 £2.42

The Tribunal arriving at a 40% discount which includes the discount for "lack of marketability" you really need to read the Tribunal ruling to see the arguments put forward and references to other commentators on Share Value issues.

Although every case is different this gives some insight into discount levels when valuing unquoted companies and their the shareholdings in them.

TG

Offline Liz  
#9 Posted : 25 September 2014 14:02:34(UTC)
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Wow,

Thanks all for the comments so far Tax Guru thanks for taking the time to post the links and info on discounts and the Erdal case.

Very helpful and appreciated, All

Maybe we will get even more useful posts to this discussion thread about share valuations I will certainly fid it a handy resource to come back to!

Liz
Offline Liz  
#10 Posted : 25 September 2014 14:26:37(UTC)
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Reading through the Erdal case the shares the Tribunal was ruling a value in as at 31 March 1982 represented on around 1% of the issued share capital with the Russell trust owning 51% (to which Mr Erdal appears to be unconnected, importantly).

So the 40% discount in that case already took into account a minority shareholding.

However the company was a long established company Incorporated in May 1906 so around 100 years old operating from a 250 acre site in Fife Scotland well established manufacturing high quality engineered paper products for customers worldwide. The paper mill having been originally founded almost a 100 years before that in 1809!

On Companies House the company concerned I think is Tullis Russell Papermakers Limited although the Tribunal ruling actually refers to Tullis Russell Ltd but there is no such company on the register.

TULLIS RUSSELL PAPERMAKERS LIMITED
ROTHESFIELD
MARKINCH
FIFE
Company No. SC006195

Status: Active
Date of Incorporation: 21/05/1906

To put this into perspective the oldest company registered at Companies House is currently Cupar Corn Exchange
Limited, company number 53 incorporated on 13 February 1860 so Tullis Russell Papermakers Limited must be one of the oldest and this need to be remembered when looking at the Erdal tribunal case discount percentages etc.

Don't let HMRC quote Erdal out of context in this respect!

I doubt many clients with unquoted private shareholdings needing valuation will be quite so well established! In fact the Tribunal say in the Erdal ruling that they viewed shares in this company as slightly less difficult to market for sale than say a smaller less well established company and reduced the "marketability discount" because of that as far as I can see from 50% to 40% largely for that reason.

So if a discount of around 50% before reduction by the Tribunal to 40% to reflect less "marketability" affect applies to Tullis Russell Papermakers Limited a larger discount may well be more appropriate for smaller less established unquoted companies.

Although if breaking the discounts down between "size of holding" (to reflect the power the voting rights of the holding in question carry) and "lack of marketability" discounts need to combined need to reflect the facts of each case.

Hence the Tribunal comment that discounts (overall) seem to span the 25% to 75% margins.

Controlling holdings over 50% and over 75% holdings will be lower down the scale generally from my reading of this but interestingly the Erdal ruling seems to cast doubt of the importance of "voting rights" i.e. voting power and the affect this has on the valuation.



Liz

Edited by user 25 September 2014 14:57:33(UTC)  | Reason: Added bit more detail about company Tullis Russell as this is important when reading this

Offline Freddy  
#11 Posted : 25 September 2014 15:26:35(UTC)
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Hi Liz

Saw reference to this discussion on Twitter today...

One thing to remember if you are dealing with a share valuation for say a transfer of shares into a trust maybe for future IHT planning possibly more so for investment or property companies if qualifying for Business Property Relief is an issue, say.

Remember that especially for a controlling holding transfer to trust (that gives away controlling votes to the Trust) that the "loss to the estate" is the value!

Giving away control means a bigger in loss in value = higher value this is often overlooked if your are used to doing values for CGT reasons, the IHT issues and "loss to estate" of the donor.

In one case I have seen where this was over looked HMRC's adjusted values almost pushed the value of the shares for IHT purposes over the IHT Nil rate band.

It could have been embarrassing or difficult explaining that to the client if your report to the client had overlooked it and the client was suddenly and unexpectedly faces a lifetime charge 20% IHT.

Especially as by nature gains are often held over with share transfers into trust so the client has not received and cash with which to pay the IHT exposure.

Caution needed when initial discounts are decided on especially if there is little margin for adjustment by HMRC who can be very rude, difficult and poorly experienced in this area even at SAV in HMRC and very stubborn.

Freddy
"Tax Does Not Have To Be Taxing". HMRC's old advert always makes me laugh for it's sheer stupidity...
Offline Scooby  
#12 Posted : 23 April 2015 09:52:33(UTC)
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Liz et all

Very useful thread came across this discussion threat and forum in a Google search very useful.

share valuation is a topic I reasonably frequently get involved with as a tax adviser in the UK and this thread is particularly useful for a number of the share valuation points raised here so far.

Hopefully other UK tax advisers will feel included to participate as a free resource it is a fab string to ones bow!

Keep it up!

Scooby
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