Market value of employee related shares

Market value of employee related shares

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s.421 ITEPA 2003 states that for the purposes of chapters 1 to 5 of Part 7, market value has the same meaning as it has for capital gains tax purposes.

This leads to s.273(3) TCGA 1992 (in relation to unquoted companies) which states that the valuation should be based on a hypothetical purchaser having all the information a prudent purchaser... might reasonably require if he were proposing to purchase it from a willing vendor by private treaty and at arm's length.

Therefore the actual information available to the employee is irrelevant (see IR FAQ Q1(n) http://www.inlandrevenue.gov.uk/shareschemes/faq_emprelatedsecurity-ch1.htm#k)

I have this scenario:

1. Shares are to be awarded to employees from an EBT.
2. I want to justify the lowest possible valuation.
3. A s.431 ITEPA 2003 election shall be made so that MV is to be determined ignoring the restrictions [which will not be lifted within 5 years]).
4. The EBT puchased shares from a 'good leaver' early last year at say £5 per share. The Articles state that a good leaver should be paid MV!
5. The EBT is totally independent of the employer although the employer made a contribution to the EBT to provide the funds.
6. The March 2003 accounts (indicating heavy losses) were not available.
7. The shares are currently being valued with a heavy weighting for the 'earnings bais' which include the heavy losses. Therefore the share value is much lower, however I am concerned that the share buy back from the EBT created a market.
8. If s.421 applies then it will have to be assumed that the March 2003 accounts information was available in arriving at the £5/share.
9. However, does s.421 apply in this case? My understanding is that the shares are treated as earnings under s.62, Part 3. s.421 appears to only apply to Part 7!
10. What therefore is the basis of valuation for s.62? Answer: money or money's worth. Can it be argued that the share value plummeted when the March 2003 accounts became available? 2004 also shows a loss.
11. If an employee already owns 15% and receives a further 15%, is the money's worth calculated as 1/2 x mv x 30% share since the additional 15% means that 30% could be turned into account?

Can someone please put me out of my misery!!
Daren Peacock

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