In this section
TUS consultation sent to Paul Vardy, Jerry Bromfield, Jim McKenna, Gwenda Binks
16.1 Shares and Assets Valuation
Shares and Assets Valuation (SAV) is a section of the HMRC Charities Assets and Residence (CAR) Business Unit mainly dealing with the valuation of unquoted shares. SAV also provides specialist valuation advice to HMRC in respect of a variety of other assets including goodwill, livestock, bloodstock, patents and royalties, gold and other bullion, ships and aircraft, mobile homes and wine.
SAV will usually request advice from the VOA in one of two circumstances, namely:
- when the value of shares in an unquoted company reflects wholly or substantially the value of underlying assets comprising either freehold (feuhold in Scotland) or leasehold property, or plant or machinery, owned by that company, SAV will refer the case to the VOA for a valuation of those assets (see para 16.3); or
- when SAV is asked to provide a valuation of goodwill in a business and deccides that a property valuation will also be required (see para 16.16 below.)
16.3 Assistance in ascertaining the value of a shareholding
When SAV has requested valuation advice in order to determine the value of the shareholding transferred, caseworkers should not enter into discussion with the taxpayer or their representative concerning the value of the shares.
In such cases, it should be noted that there is no requirement for the VOA to ascertain the “value transferred” or the “value of the property transferred” since these terms relate to the value of the shareholding, which is a matter for SAV. The property which is required to be valued has not of itself been transferred (see also para 16.8).
Most references from SAV will be forwarded on form SAV/VOA1 (Appendix 5). However, the following types of SAV cases will normally be referred by memorandum (see also para 16.44 below):
- shipping and air transport,
- foreign property,
- plant and machinery
- milk quotas
- cases forwarded via the Land Portfolio Valuation Unit (LPVU).
16.5 Information on Form SAV/VOA1
As well as giving the name of the taxpayer, the company involved and details of the officer dealing with the case, Form SAV/VOA1 will contain the following information:
- f) the nature of the tax e.g CGT/SDLT/IHT);
- g) the date of valuation;
- h) the total value returned for the property(ies);
- i) details of the tolerance range within which the returned value can be accepted (normally this will be the larger of 15% or £30,000, if different tolerances are to be utilised the box will be ticked and details of the tolerances required will be included on a separate memorandum);
- j) details of any other SVT sector geographical areas involved
SAV will normally provide details of the properties to be valued on Form CAP37 (Appendix 7).
16.6 Information on Form CAP37
Form CAP37 again contains details of the company involved, the date of valuation and SAV reference. This form is normally completed by the taxpayer or their agent and additionally will contain:
- f) The name and address of any person the VOA should contact, together with their reference and telephone number (but see para 16.32 below);
- g) for each item number (column 1), the full address or description of the property to be valued (column 2), details of the tenure under which it is held (column 3), details of any lettings (column 4), details of any agricultural/timber element (column 5) and the value returned by the parties (column 6). Both of these latter elements will be totalled at the foot of the respective columns.
16.8 Adoption of statutory basis of “open market value”
In SAV cases, where the property being transferred is the shareholding and not the company assets, there is no statutory basis of valuation for the underlying property.
In particular SAV consider that in strictness the principle in IRC v Crossman (1937) AC26 applies to the Company shareholding only, and does not operate to remove a bar on assignment of a leasehold interest (which term includes annual agricultural tenancies). Nevertheless the leasehold interest is, in effect, still assignable by a transfer of the company’s shares and, as a company is immortal, an annual agricultural tenancy assigned in this way can continue indefinitely. Accordingly, a valuation on a similar basis to Crossman is generally appropriate but Crossman should not be cited and, if this issue arises in negotiations, the caseworker should withdraw from negotiations and seek further instructions from SAV. Meanwhile the parties should be advised to conduct any further correspondence on the matter with SAV. An opinion of value should be formulated on the Crossman basis and reported, without negotiation, to SAV, stating why it was necessary to withdraw from negotiations.
Generally, however, the underlying company property or assets should be valued on the basis of the statutory definition in s.160 IHTA 1984 and s272 TCGA 1992 “open market value” disregarding any “flooding of the market”. Any relevant legal principles which have evolved over the years when the Courts have ruled on the meaning of the similar definition for ED purposes contained in s.7(5) FA 1894 should also be applied (see Section 7.)
Finally caseworkers must be careful to distinguish between those cases where a reference has been made in connection with a valuation of shares and those where SAV has been asked to carry out a valuation for some other purpose not connected with share valuation. In the latter case a valuation on the strict statutory basis may be applicable (e.g. where a property valuation is required so that disposal proceeds can be apportioned between the property and goodwill (see para 16.16). If there is any doubt as to what assets are being taxed or whether the statutory basis should apply to a valuation, advice should be sought from CEO.
16.9 Statutory basis unsatisfactory or objected to
There will be cases where the application of the statutory basis of valuation produces an unreasonable result. SAV will normally seek to identify such cases and issue instructions accordingly. However, if the parties refuse to accept that a valuation on the statutory basis is appropriate or if the caseworker feels that application of the statutory basis would produce an unreasonable result, the case should be referred to CEO.
In all cases valuations should be based on open market value (see paras 16.8-9 above), having regard to the evidence of open market transactions in similar property in the normal way. Regard should be had to both existing and alternative uses to the extent to which these are reflected in the price obtainable in the open market.
16.12 Properties which are normally sold as fully operational businesses
Certain properties change hands in the open market at prices based directly on their trading potential e.g. hotels, some restaurants, public houses, cinemas and other specialist leisure properties, petrol filling stations residential care homes and mineral undertakings. Therefore, when valuing an interest in possession in such properties, regard should be had to the accounts of the business being conducted there from.
16.13 Plant and Machinery
SAV may request a separate valuation of plant and machinery at a property. In such circumstances the value of the plant and machinery should be reported separately from the freehold or leasehold property (see para 16.66 below).
The services of the National Assets and Building Surveyors (Plant and Machinery Team) are available for assistance. An inspection should be made in all cases, where a valuation of plant and machinery is required.
SAV will, if possible, furnish schedules of the plant and machinery to be valued. Where the request is just in regard of general plant and machinery, all the plant and machinery on the site should be valued (including cars and motor vehicles) except for that which would normally be valued as part of the building eg. foundations, settings, and items used in connection with the main transmission of power, heating, cooling, ventilating, lighting, draining and supplying of water and the protection of the site from hazards.
Goodwill is not easily defined but the two commonly quoted definitions are:
- Lord McNaghten’s description in the case of IRV v Muller and Co Margarine Ltd (1901) (AC217): “It is a thing very easy to describe, very difficult to define. It is the benefit and advantage of the good name, reputation and connections of the 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 stage.”
- The definition contained in the Shorter Oxford Dictionary:
“Goodwill is the privilege granted by the seller of a business to a purchaser of trading as his recognised successor; the possession of a ready-formed connection with customers considered as a separate element in the saleable value of a business.”
So for goodwill to exist there must be a business and the VOA will be involved in the valuation of the property from which that business is conducted, together with any other physical assets.
16.15 Types of Goodwill
In the past we have traditionally grouped goodwill into different types: e.g. “inherent”, “adherent” and “free”
This approach is no longer considered helpful and has led to confusion in that we have been trying to find the appropriate heading for the goodwill rather than looking at the fundamental question of whether it is goodwill or not.
Inherent and adherent are not really goodwill but form part of the property asset (although this is by no means accepted by all professionals).
16.16 Scope of assistance
SAV deals with all cases involving the valuation of goodwill for Capital Gains Tax and other HMRC purposes, but will request VOA assistance where appropriate. For the avoidance of doubt, if a reference is received direct from another branch of HMRC either requesting a valuation of goodwill, or it is apparent that an element of goodwill will need to be valued, SAV (Goodwill Section) should be consulted before any further action is taken. Normally, where a specific valuation is required in order for SAV to determine the value of the goodwill of a business, the request will be routed either via CEO Professional Support (HMRC Team) (for CGT cases), or the LPVU (for SDLT and non capital gains Corporation Tax cases)
For details of procedure in Capital Gains Tax cases see CGT Manual 7.40 - 7.44.
16.17 Licensed property
A valuation of licensed property will normally reflect an element of trading potential attaching to the property by reason of the licence, estimated by reference to trading figures, but no attempt should be made to furnish a separate figure for it.
16.18 Mineral undertakings
Special considerations may apply to the treatment of goodwill in mineral cases. Problems relating to minerals goodwill should be referred to the Mineral Valuer.
Transfers of value in respect of shareholdings in companies may be eligible for business relief under the provisions of ss.103-114 IHTA 1984. Reference should be made to Section 11.
16.20 Caravan sites
SAV may require additional information to determine whether business relief is applicable in respect of companies operating caravan sites. Any valuation request in respect of a caravan site will usually be accompanied by a questionnaire (Appendix 30) and this should be completed and returned when the opinion of value is reported.
Agricultural relief (ss.115-124C IHTA 1984) applies to that part of the value of shares in or debentures of a company which is attributable to the agricultural value of qualifying agricultural property, provided that the particular conditions set out in s.122 are satisfied. This will be determined by SAV.
When referring the case SAV will advise by memorandum of any agricultural property owned by a company which qualifies for relief. Reference should be made to Section 9 Part 2 for detailed instructions and requirements on agricultural relief in this respect.