Netley v HMRC (2017)


In a lead case, the tribunal examined the basis and principles on which the market value of shares admitted to the Alternative Investment Market and gifted as "qualifying investments" to a charity under the Income and Corporation Taxes Act 1988 s.587B should be determined. The purpose of the valuation was to establish the correct amount of tax relief generated by the gift. The tribunal determined that the availability of gift relief had been incidental to the flotation of the relevant company, not its main purpose. It construed the Taxation of Chargeable Gains Act 1992 s.272and s.273, concluding that AIM shares were neither "quoted on the Stock Exchange Daily Official List" (SEDOL) nor "quoted on a recognised stock exchange". The price of the shares on SEDOL was not, therefore, a true measure of their market value. The proper valuation was the price which the hypothetical prudent purchaser would pay in the open market.


The appellant appealed against HMRC's reduction of the income tax relief he had claimed concerning shares he had gifted to charity.

The appellant had invested £10,000 to subscribe for shares in a company in June 2004. A month later, the company was admitted to the Alternative Investment Market (AIM) on 28 July 2004, and on the date of admittance, the appellant gifted the shares to a charity. Under the Income and Corporation Taxes Act 1988 s.587B, shares quoted on the AIM were qualifying investments that were eligible for income tax relief when gifted to charity. Tax relief was given by reference to the market value of the qualifying investment. The appellant claimed relief based on a valuation of 48p per share, being the price they had traded at on the AIM on 28 July. The resultant relief was £15,866 and was therefore higher than the amount he had invested to subscribe for the shares. HMRC valued the shares at 8p instead, reducing the tax relief to £2,624. Amid HMRC's concern that the AIM and gift relief provisions were being exploited by a number of taxpayers, the instant proceedings were a lead case to determine on what basis and principles the market value of such shares should be determined. The relevant provisions for determining the market value of qualifying investments on the AIM were the Taxation of Chargeable Gains Act 1992 s.272 and s.273.


Stock Exchange Daily Official List - Where shares were quoted in the list, their market value was determined by reference to s.272(3). There was some ambiguity as to what was meant by "quoted" in the list, but Parliament must have intended AIM shares to be treated in the same way as shares on its predecessor, the Unlisted Securities Market, which were excluded from s.272(3). Accordingly, s.272(3) did not apply in calculating the market value of AIM shares for the purposes of gift relief (see paras 178-184 of judgment).

Recognised stock exchange - Where shares were quoted on a recognised stock exchange for the purposes of s.273, determination of their market value depended on particular information being treated as available to a prospective purchaser. When AIM was introduced in 1995 it was not a recognised stock exchange. The absence of any controversy since then as to whether AIM shares fell within s.272(3) and s.273(2) suggested that there was a well-established and common understanding that AIM shares were not quoted on a recognised stock exchange. Further, that interpretation was consistent with the concept that the statutory intention concerning market valuation was to produce a fair basis of valuation between the Crown and the subject, Lynall v Inland Revenue Commissioners [1970] Ch. 138 followed. The market for AIM shares could be illiquid, and the price at which small volumes were traded on a particular day could not, without more, be viewed as a reliable proxy for the open market value of those shares (paras 189-196).

Appropriate basis for market valuation - The appropriate basis was to consider what information would have been available to the hypothetical prudent purchaser of the shares, which consisted of public information supplemented by information to be assumed pursuant to s.273(3), being all information that they might reasonably require from the vendor if the sale was a sale by private treaty. The ultimate question was what the prudent purchaser would have paid for the shares in the open market based on that information. In the instant case, the appropriate market value of the appellant's shares was 17.5p per share (paras 208-211, 214, para.230, para.276).

Appeal allowed in part