When carrying out a valuation for tax purposes it must calculated 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 providing the appropriate figures to allow HMRC to calculate it on their behalf. Unless the statutory and legal basis for valuing unquoted shares for tax purposes is followed, if a valuation is successfully challenged by HMRC not only interest on the unpaid tax but also penalties may result.
The correct basis is the market value as defined in the relevant statute – s.272 of The Taxation of Chargeable Gains Act 1992; s.160 of the Inheritance tax Act 1984; and if related to stamp duty, in s.118 of the Finance Act 2003. The definitions in each Act are broadly similar and define market value as the price that the property might reasonably be expected to fetch if sold in the open market.
Over the years this issue has been examined by the Courts in numerous cases. The case law was usefully summarised in IRC-v-Gray in 1994 which established some important assumptions which must be made when arriving at the market value of any asset:
- 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 deemed a “special “ purchaser)
- 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 bring the best price
- The sale is brought to the attention of all likely purchasers
- The valuation should reflect the bid of any special purchaser (one who, for his or her own reasons, might be prepared to pay a sum in excess of the price that other hypothetical purchasers in the market would be prepared to pay for the particular asset).
A valuation for tax purposes really is one area where a taxpayer should consult a specialist. An attempt to go it alone may well work out to be a very expensive option.