Share valuation

By Tolley in association with Andrew Rainford
Share valuation

The following Employment Tax guidance note by Tolley in association with Andrew Rainford provides comprehensive and up to date tax information covering:

  • Share valuation
  • Open market value
  • Potential valuation situations
  • Underlying legislation
  • Quoted companies
  • Private companies
  • Contact details

This guidance note provides an overview of the valuation of shares in the context of employee reward.

It is strongly recommended that anybody wishing to obtain aformal valuation should get advice from an experienced practitioner.

Open market value

In order to determine the value of acompany’s shares in connection with atransaction involving employees, it is usually necessary to determine the price that awilling buyer would pay awilling seller, assuming that both of them have full knowledge of all information that is publicly available at the time of the sale.

One factor that must be taken into account is the size of shareholding. It is generally recognised and understood that where somebody has avery small uninfluential shareholding that this is worth considerably less per share than acontrolling shareholding.

As an example, while some shares that form part of a100% shareholding will clearly be worth the appropriate percentage of the whole value of the company, if an employee is offered 0.01% of the company’s shares, they will not have any significant voting power. They may also be prevented from selling shares other than in limited circumstances and will be obliged to follow the whims of the majority shareholder. In such situations, it would be usual to negotiate avery substantial discount, ie more than 50%.

Potential valuation situations

Valuations may be required in several circumstances, some of which are detailed below. When somebody acquires shares, there is likely to be atax liability, which means that the value of the shares is of relevance. Similarly, the exercise of an option creates apotential tax charge, which may mean that avaluation is required.

When restrictions on the shares are lifted, this may also give rise to atax charge and some kind of valuation is required, although this

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