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HMRC internal manual

Shares and Assets Valuation Manual

HM Revenue & Customs
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The Statutory Open Market: Case Law - the Purchaser

The cases outlined at SVM113050 tell us the purchaser is prudent.

Rowlatt J in Re Courthope [1928] 7 ATC 538 at page 540 said:

I have, of course, to consider those questions but I have to consider them through the supposed purchaser in the market. I have to look for a man who after he has considered those things and has considered everything else and what else he could do with his money and all the rest of it finally makes up his mind to give a certain price. That is the sort of way in which I have to look at it.”

Lord Fleming in Salveson’s Trustees v IRC [1930] 9 ATC 43 at page 46 said:

“The problem can only be dealt with by considering all the relevant facts so far as known at the date of the testator’s death and by determining what a prudent investor, who knew these facts, might be expected to pay for the shares.”

It is also well established that the purchaser (and the vendor) is hypothetical and willing.

In the words of Lord Morris in the Lynall case:

“It became common ground that the price to be decided on was that which would have been paid (a) by a hypothetical willing purchaser (b) to a hypothetical willing vendor (c) in the open market…”

Anyone in the whole world may be the purchaser:

“the property is offered for sale to the world at large so that all potential purchasers have an equal opportunity to make an offer as a result of its being openly known what it is that is being offered for sale” (Lynall at 699B per LordMorris).

In re Crossman HL [1937] AC 26:

”… it appears from the judgement (in the Court of Appeal) that Lord Plender ‘did not exclude anybody or include anybody in particular; he considered the matter generally.’ In my opinion that is the right way in which to arrive at the value in the open market.”

Hailsham L C at page 43

The purchaser is the highest bidder.

Per Lord Reid in Attorney-General of Ceylon v Mackie [1952] 2 All ER at page 777:

“So the shares must be valued on the footing that the highest bidder in the open market would have been registered as a shareholder, but that he would then have become subject to the restrictions in the articles.”

Per Lord Reid in Lynall v IRC [1972] AC 680 at page 917:

“We must decide what the highest bidder would have offered in the hypothetical sale in the open market, which the Act requires us to imagine took place at the time of Mrs Lynall’s death.”

Salomon v Commrs of Custom & Excise [1966] 2 AER 340:

“In my view, the notional seller… is, as is contended on behalf of the Commissioners, a seller whose object is to get the highest available price.”

Megaw J at page 345

Ellesmere (Earl) v IRC [1918] 2 KB 735:

”… price is the best possible price that is obtainable.”

Sankey J at page 740

Although the purchaser is hypothetical, the question has arisen of whether the real owner of the shares might be regarded as a prospective purchaser. In Stephen Marks v HMRC FTT (TC) 25 the appellant owned two holding companies that were operating together (in the French Connection business) at 31 March 1982. It was decided that the two groups had to be valued separately. The issue arose of the extent to which if one is considering the sale of the first company by a hypothetical vendor the Appellant, as owner of the second company, is in the market (and vice versa). The tribunal applied the logic of the decision by the Court of Appeal in Walton v IRC [1996] STC 68, concerning the valuation of the deceased’s interest in an agricultural tenancy as a partner with one of his sons (J). The freehold was owned by the deceased and his two sons (J and F). The Lands Tribunal had valued the tenancy on the basis that one should assume that the deceased retained his identity as landlord. The Court approved this approach, citing Lawton L in Trocette Property C Ltd v Greater London Council [1974] 28 P&CR 408 at 420:

“It is important that this statutory world of make-believe should be kept as near as possible to reality. No assumption of any kind should be made unless provided for by statute or decided cases.”

In applying the same principle to the valuation of the French Connection holding companies, the Tribunal found that, although the statutory hypothesis does imply the existence of a hypothetical purchaser, it does not require one to ignore the characteristics of any actual potential purchasers. The tribunal observed that the Appellant’s separate ownership of the two groups would be known to the other potential purchasers in the market. Drawing on the decisions in IRC v Clay [1914] 3 KB 466 (see SVM113070) and the words of Hoffmann LJ in IRC v Gray [1994] STC 360 (see SVM113050) the tribunal decided that there did not seem to be any need to exclude an actual potential purchaser from the market. Reference was made to the fact that the RICS Red Book that relates to valuations of land does include the actual owner as a potential purchaser indicates that this is recognised in other valuation contexts.

If it is assumed the actual owner is in the market as a prospective purchaser, the tribunal found that although, the actual owner’s information about the asset being valued is bound to be greater than the information that a prudent prospective purchaser might reasonably require, there is no theoretical difficulty in assuming that the actual owner cannot use any information beyond that reasonably required in deciding how much to offer. Nonetheless, the tribunal did not consider that the advantage to the actual owner of one company in buying the other should be discounted.

  Additional Guidance:SVM150000