United Kingdom
17 February 2011 - First Tier Tribunal share valuation ruling
In an interesting recent case, the First Tier Tribunal has ruled on the method of valuing an unquoted trading company's shares, including the appropriate price/earnings (PE) ratio and discount for lack of marketability, a low dividend history and other factors.
Prior to the hearing, the taxpayer argued that the ordinary shares were valued at £4 each, based on a PE ratio of 14 and a 25 per cent discount. HMRC, supported by a share valuation specialist, contended that they were worth between £1.20 and £1.25 each, based on a PE ratio of 12.6 and a 50 per cent discount. During the hearing the taxpayer conceded a valuation of £3.29.
The Tribunal noted that the share valuation specialist had not seen management accounts or cash flow statements, and considered that this was a material omission, in view of the fact that a prudent purchaser would have requested these and taken the information into account.
The Tribunal reiterated that each case depended on the particular facts and circumstances, and it did not therefore consider it worthwhile or appropriate comparing discounts used in other share valuation cases, but noted that discount percentages seemed to range between 25 and 75 per cent.
Having reviewed all the relevant facts and circumstances, including the company's recent investment in new plant, the Tribunal decided that a PE ratio of 14 was appropriate. It also modified the discount to 40 per cent, on the basis that the company was slightly "less unmarketable" than other private companies. Based on these and other adjustments, the Tribunal concluded that a discounted value of £2.42 per ordinary share should be used.
Please contact Diane Elliott for advice or assistance in relation to any share valuations.