ICAEW.com works better with JavaScript enabled.

Tax: to provide or not to provide, that is the question

Those who undertake share valuations frequently have to opine as to whether a deduction should be made for contingent tax liabilities.

In the family courts it is generally accepted that, in order to achieve a fair division of marital assets between divorcing parties, account needs to be taken of the capital gains tax that would arise if they were to be realised. That position was endorsed in the Scottish case of Dow v Sweeny (2003) SCLR 85 in which the judge concluded that the net value of the matrimonial property was its value after deduction of latent capital gains tax.

By contrast, the position in the commercial courts is less clear cut. In the case of Goldstein v Levy Gee [2003] EWHC 1574 (Ch), the court considered whether it would be appropriate when valuing shares in a company to make a deduction for the corporation tax that would be payable if the company were to sell its investment properties.

The court recognised that a hypothetical buyer of the shares in the company would acquire a latent tax liability that would crystallise if the properties were subsequently sold by the company. However the buyer could defer the liability by delaying a sale of the properties or avoid it altogether by selling the shares.

In the judge’s opinion, the test as to whether and to what extent a discount for latent tax should apply should be assessed with reference to what might have been negotiated between a hypothetical buyer and a hypothetical seller. In the words of the judgment:

"The natural aspiration of the seller would be to achieve no deduction for contingent tax liabilities. The natural aspiration of the buyer would be to achieve 100 per cent deduction. Both the hypothetical buyer and the hypothetical seller are willing. I do not think that anyone suggested any particular reason why one would have a stronger bargaining position than the other. If the parties are of equal bargaining power, it seems to me that they would meet in the middle and agree a deduction of 50 per cent of the contingent tax liabilities."

In the author’s opinion the effect of this judgment is not that a deduction of 50% of the contingent tax will be appropriate in all cases. A competent valuer will need to take a pragmatic and commercial approach which should take into account relevant factors including the history of the business and the particular circumstances prevailing at the valuation date. In some cases this may suggest that a deduction of more than 50% of the latent tax is appropriate but in other cases a lesser deduction may be justified.

Roger Isaacs, Partner, Milsted Langdon

Forensic and Expert Witness Group, May 2016

© Milsted Langdon 2015. A version of this article was previously published in the November 2015 NIFA newsletter.