ETASSUM28180 - Schedule 2 share incentive plan (SIP): Supplementary and defined terms: Market value – definition in plan rules

Paragraph 92 states that the ‘market value’ of shares has the same meaning in the SIP Code as it does for the taxation of chargeable gains by virtue of Part 8 of the Taxation of Chargeable Gains Act 1992 (TCGA). The TCGA definition is the price which the shares might reasonably be expected to fetch on the open market. The rules of a Schedule 2 SIP must include an acceptable definition of Market Value (‘MV’) which is consistent with Paragraph 92 and which will also enable a value to be established for each award of plan shares. What is acceptable partly depends on whether the eligible shares are listed on a recognised stock exchange (section 1005 ITA 2007).

For the purposes of the Schedule 2 SIP code the ‘Market Value’ of shares subject to a restriction is to be determined as if they were not subject to the restriction (the unrestricted market value).

Unlisted securities

If the eligible shares are not listed on a recognised stock exchange, the plan must provide for the value to be determined in accordance with Part 8 TCGA 1992. Although it is not a statutory requirement, it is desirable that the Schedule 2 SIP rules require MV (or the method by which MV will be determined on a particular date) to be agreed with HMRC Shares & Assets Valuation (“SAV”) in advance for the purposes of the plan.

Listed securities

If the eligible shares are quoted in the London Stock Exchange Daily Official List, (or on any recognised stock exchange see ETASSUM23240) (this does not include AIM shares) the market value can be defined in the scheme rules by reference to quotations derived from the Daily Official List,(or Foreign Exchange List) using the provisions which are at regulation 2 of The Market Value of Shares Securities and Strips Regulations 2015 (SI 2015/616) and summarised below:

  • on any day the Exchange is open, the lower of the two prices shown in the Stock Exchange Daily Official List, using for that day as the closing price of the shares on that day plus one half of the difference between those two figures, and
  • on any day the Exchange is closed, the value on the latest previous day on which it was open.
  • Note the above method of valuing shares will not apply where, in consequence of special circumstances, the closing price mentioned above are not by themselves a proper measure of the market value of the shares or securities.

It is acceptable for the price on the dealing day immediately preceding the award date to be used.

In addition and as further provided for by regulation 2(2) of SI 2015/616, HMRC will also accept the following alternative methodologies, although this list is not intended to be prescriptive:

  • The average of the values, as determined in bullets 1 and 2 above, over consecutive dealing days prior to the grant. Averaging over three days is the most common period, but up to five days is acceptable. This period can end on the award date or the day before the award date.
  • Where shares are purchased over a period of up to five days, the average of the actual amounts paid for the shares acquired.
  • Where shares are purchased on one day only in a single purchase, the actual amount paid for the shares acquired.
  • Where shares are purchased on one day only but by multiple trades, the average of the actual amounts paid for the shares acquired.

Where an average is used the company must decide which price and days will be used and draft the definition of MV accordingly: if more than one method is specified, the plan should state the circumstances in which each will be used.

Whatever methodology is used must represent a proper measure of the market value.