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HMRC internal manual

Employment Related Securities Manual

Employment-related securities and options: meaning of ‘market value’

Old legislation

In the old legislation the principle for valuing securities varied according to the charging provision in point:

  • money’s worth, which is something capable of being converted into money or something of direct monetary value (e.g. the interpretation of the term “emoluments” used at ICTA88/S131(1), as developed by case law),
  • what might reasonably be expected to be obtained from a sale in the open market (e.g. ICTA88/S135(3)(a) on share options), and
  • the Capital Gains tax (TCGA) value (e.g. ICTA88/S162 on notional loans).

Current legislation

To establish some consistency, all Chapters within Part 7 of ITEPA 2003 now use the TCGA definition of market value as does the related legislation on CT deductions in Part 12 of CTA 2009. (But see ERSM80130 on the decision in Grays Timber.) However, the charge on acquisition of securities is still often the money’s worth charge under ITEPA03/S62. In practice, there is rarely any difference in the valuation between these different bases. However, if TCGA-defined market value exceeds money’s worth by any material amount, then any excess can be charged on acquisition under Chapter 3C (see ERSM70210). If the claimed market value is less than the money’s worth value, Shares & Assets Valuation (SAV) should be consulted.

More generally, if the basis of valuation appears to be material; consideration should be given to seeking the view of SAV.

TCGA 1992 valuation {#IDAOHE3H} (Pre 6 April 2015)

ITEPA03/S421 establishes that “market value” has the same meaning as Part 8 of TCGA 1992. In particular, TCGA92/S272 provides the general rule:

(1) In this Act “market value” in relation to any assets means the price which those assets might reasonably be expected to fetch on a sale in the open market.

(2) In estimating the market value of any assets no reduction shall be made in the estimate on account of the estimate being made on the assumption that the whole of the assets is to be placed on the market at one and the same time.

(3) Subject to subsection (4) below, the market value of shares or securities in The Stock Exchange Daily Official List shall, except where in consequence of special circumstances prices quoted in that List are by themselves not a proper measure of market value, be as follows-

(a) the lower of the 2 prices shown in the quotations for the shares or securities in The Stock Exchange Daily Official List on the relevant date plus one-quarter of the difference between those 2 figures, or

(b) halfway between the highest and lowest prices at which bargains, other than bargains done at special prices, were recorded in the shares or securities for the relevant date,

choosing the amount under paragraph (a), if less than that under paragraph (b), or if no such bargains were recorded for the relevant date, and choosing the amount under paragraph (b) if less than that under paragraph (a).

(4) Subsection (3) shall not apply to shares or securities for which The Stock Exchange provides a more active market elsewhere than on the London trading floor; and, if the London trading floor is closed on the relevant date, the market value shall be ascertained by reference to the latest previous date or earliest subsequent date on which it is open, whichever affords the lower market value

TCGA92/S273 provides the modifications for unquoted securities:

(1) The provisions of subsection (3) below shall have effect in any case where, in relation to an asset to which this section applies, there falls to be determined by virtue of section 272(1) the price which the asset might reasonably be expected to fetch on a sale in the open market.

(2) The assets to which this section applies are shares and securities which are not quoted on a recognised stock exchange at the time as at which their market value for the purposes of tax on chargeable gains falls to be determined.

(3) For the purposes of a determination falling within subsection (1) above, it shall be assumed that, in the open market which is postulated for the purposes of that determination, there is available to any prospective purchaser of the asset in question all the information which a prudent prospective purchaser of the asset might reasonably require if he were proposing to purchase it from a willing vendor by private treaty and at arm’s length.

Valuations from 6 April 2015

The Market Value of Shares, Securities and Strips Regulations 2015 (SI 2015/616) took effect from 6 April 2015 and changed the way shares are valued for the purposes of the TCGA.

On any day that the Stock Exchange is open, the value will be

* the lower of the two prices shown in the Stock Exchange Daily Official List for that day as the closing price for the shares, securities or strips on that day
* one-half of the difference between those two figures.
  If the Stock Exchange is closed then it will be the value on the latest previous day on which it was open using the method above.However this valuation method won't be used where special circumstances mean that the closing prices quoted in the Stock Exchange Daily Official List are by themselves not a proper measure of market value of the shares or securities.

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Grays Timber Products Limited v HMRC

In Grays Timber Limited v HMRC (UKSC 2009 0044), the Supreme Court considered whether the disposal of the shares had been for a price which exceeded the market value of the shares at the time of the disposal; this required consideration of the definitions of “market value” adopted by ITEPA 2003.

For the effects on the meaning of “market value” for the purposes of Part 7 of the decision in Grays Timber Products see ERSM80130.