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Cite as: [2008] UKSPC SPC700, [2008] UKSPC SPC00700

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McArthur, Executors Of v Revenue & Customs [2008] UKSPC SPC00700 (09 July 2008)

Spc00700

Inheritance Tax; share valuation; convertible unsecured loan stock; family companies; whether option to take shares valid or in doubt; whether options prescribed; effect on valuation of conversion rights; valuation assumptions; percentage deduction for minority and majority shareholdings; Inheritance Tax Act 1984 sections 4, 160, & 168(1); Prescription and Limitation (Scotland) Act 1973 Schedule 2 paragraph 2(2)(b).

THE SPECIAL COMMISSIONERS

EXECUTORS OF IAN CAMPBELL McARTHUR (Decd) Appellants

and –

THE COMMISSIONERS FOR HER MAJESTY'S REVENUE & CUSTOMS Respondents

Special Commissioner: J GORDON REID QC, F.C.I.Arb

Sitting in public in Edinburgh on 15-17 and 28-29 April 2008

Philip Simpson, advocate, instructed by Gillespie MacAndrew, Solicitors, Edinburgh, for the Appellants

Roderick N Thomson, advocate, instructed by D S Wishart, HMRC solicitors, office, Edinburgh, for the Respondents

© CROWN COPYRIGHT 2008


 


DECISION

Introduction

1. These are three appeals by the executors of the late Ian Campbell Macarthur (the "deceased") who died on 14^th July 1994, against Notices of Determination dated 13^th December 2006. The deceased was the senior partner of the firm of MacArthur & Co. Solicitors, Inverness. The issue is the proper valuation of certain majority and minority shareholdings of the deceased in three private family companies. The issue is complicated by the fact that the deceased made loans to two of these companies; depending upon the analysis of the arrangements entered into these loans may have, in effect, been of the broad nature of holdings of Convertible Unsecured Loan Stock. They were, in the main, referred to as "options" or conversion rights in the evidence. The nature, scope and enforceability of these options are in issue. The determination of that disputed issue has a significant bearing on the value of the deceased's estate for Inheritance Tax purposes.
2. The Appellants were represented by Philip Simpson, advocate, instructed by Messrs Gillespie MacAndrew, solicitors, Edinburgh. He led the evidence of Andrew Todd, a solicitor and partner of Dickson Minto, WS, Edinburgh, Ian Macdonald, solicitor, and partner in the firm of MacArthur & Co Inverness, Neil MacArthur the deceased's son, and Bruce Sutherland CA, CBE. Roderick N Thomson, advocate, appeared on behalf of the Respondents ("HMRC"), instructed by DS Wishart of their solicitors' office in Scotland. Mr Thomson led the evidence of Keith Eamer BA. Both parties produced statements of or reports by their witnesses. A bundle of productions was also lodged. The authenticity, and where appropriate, the transmission and receipt of the documents were not in dispute.
3. The hearing took place at Edinburgh on 15^th 16^th 17^th 28^th and 29th April 2008. Both counsel produced an Outline Submission or Skeleton Argument. Mr Thomson produced a detailed written Closing Submission.

Notices of Determination

4. Notices of Determination were issued under section 221 of the Inheritance Tax Act 1984 to each of the three executors. Each Notice determined as follows:-

"That-

1 The estate transferred included, inter alia, the value of the following moveable estate:

(i) Cape Wrath Hotel Company Limited

670 £1 Ordinary shares

(ii) Chapman of Inverness Limited

a) 2375, £1 Ordinary shares

b) Loan of £4,900

c) Option to convert loan of £3,500 to £1 Ordinary shares at par

(iii) New Inverness Laundry Company Limited

a) 991 £1 Ordinary shares

b) Loan of £8,000

c) Option to convert loan of £8,000 to £1 Ordinary shares at par.

2 The value of the Deceased's shareholding in Chapman of Inverness Limited and New Inverness Laundry Company Limited included the value of the additional 3500 £1 Ordinary shares and 8,000 £1 Ordinary shares respectively in these companies which he was entitled to acquire on exercise of the options conferred on him.

3 The value of the Deceased's shares including shares he was entitled to acquire on exercise of his options, in terms of section 160 of the Inheritance Tax Act 1984 were as follows:

a) Cape Wrath Hotel Company Limited

670 £1 Ordinary shares £81,954

b) Chapman of Inverness Limited

5,875, £1 Ordinary shares £338,768

(c) New Inverness Laundry Company Limited

8,991 £1 Ordinary shares £294,939

4 The value of the Deceased's estate immediately before his death was £1,800,943.24 and the inheritance tax thereon is £660,377.29. ..........................."

Statutory Background

5. Section 4(1) of the Inheritance Tax Act 1984 provides that:-

On the death of any person tax shall be charged as if, immediately before his death, he had made a transfer of value and the value transferred by it had been equal to the value of his estate immediately before his death

6. Section 160 of the 1984 Act provides as follows:-

Except as otherwise provided by this Act, the value at any time of any property shall for the purposes of this Act be the price which the property might reasonably be expected to fetch if sold in the open market at that time; but that price shall not be assumed to be reduced on the ground that the whole property is to be placed on the market at one and the same time.

7. Section 168(1) of the 1984 Act provides as follows:-

In determining the price at which unquoted shares or unquoted securities might reasonably be expected to fetch if sold in the market it shall be assumed that in that market there is available to any prospective purchaser of the shares or securities all the information which a prudent prospective purchaser might reasonably require if he were proposing to purchase them from a willing vendor by private treaty and at arm's length.

8. Since the days of Estate Duty, similar provisions have been made and amended from time to time for valuation on the basis of a hypothetical sale in the open market between an assumed willing buyer, acting with reasonable prudence, knowledge and foresight and an assumed willing seller.

Issues

9. The parties produced an agreed Statement of Issues. It is in the following terms:-
10. Whether the options granted to the deceased and Colonel N. MacArthur in respect of certain loans in Chapman and New Inverness were part of the loan agreements as originally constituted or varied.
11. If not, what the legal relationship between the options and the loan agreements were.
12. Whether there would have been any doubt as to the ability of the lenders to establish the existence of the loans. If there was such a doubt, what effect that would have had upon the value of the loans and of the options. However the respondents do not accept that this is properly an issue in the factual circumstances that existed and which are a matter of agreement between the parties.
13. Whether the options to convert the deceased's loans into ordinary shares in the said companies had prescribed at the date of death of Ian Campbell MacArthur.
14. Whether there would have been doubt as to whether the options had prescribed in the context of a sale by a hypothetical seller to a hypothetical purchaser. If there was such doubt, what effect, if any, that would have had upon the value of the existing shareholding and the options.
15. Whether it would have been open to the companies to repay the loans and thus defeat the right on the part of the creditor to exercise the options. The companies not having done so at date of death, whether the potential of such an occurrence is a relevant consideration for the purposes of share valuation. If it was a relevant consideration, what effect it would have had upon the value of the existing shareholding and the options.
16. Whether there would have been doubt as to whether it would have been open to the companies to repay the loans and thus defeat the right on the part of the creditor to exercise the options. If there was such doubt, what effect, if any, that would have had upon the value of the existing shareholding and the options.
17. Whether and to what extent there might have been actual hostility from the board or other shareholders to an exercise of options for shares in the companies by the deceased or by a hypothetical purchaser. Whether such hostility would be a relevant consideration in the valuation of the shares. If there was such hostility and it was relevant, what effect that would have upon the value of the existing shareholding and the options.
18. Whether the share structure of New Inverness would have presented an obstacle to the deceased or a hypothetical purchaser obtaining the option shares upon exercise of such options. If there was such a potential obstacle, what effect that would have upon the value of the existing shareholding and the options.
19. Whether, in light of the answers to the foregoing, it is appropriate to value the shareholdings in the two companies as comprising majority shareholdings respectively (comprising for the avoidance of doubt the existing shares held by the deceased and the potential shares represented by the options). If so, in light of the answers to the foregoing, what discounts should be applied to the net asset values of the companies to produce the appropriate valuation of the shares on a hypothetical purchaser basis.
20. Whether, in light of the answers to the foregoing, it is appropriate to value the shareholdings in the two companies as comprising minority shareholdings respectively (comprising for the avoidance of doubt the existing shares held by the deceased) and whether, in that event, the value transferred also comprises the outstanding loans and interest accrued thereon. If so, what discounts should be applied to the net asset values of the companies to produce the appropriate valuation of the shares on a hypothetical purchaser basis. And what value should be ascribed to the outstanding loans and the interest accrued thereon.
21. At the end of the day, neither counsel based their closing submissions around these eleven issues. Neither counsel addressed each of these eleven issues in detail in the order set forth above. The structure of their closing submissions was entirely different. I propose to address the single issue which is the proper valuation of the relevant part of the deceased's estate. It seems to me that it will rarely be helpful to single out so many issues in this type of appeal and expect the Tribunal to address each one separately, particularly when the parties themselves do not do so.

Preliminary Matter

22. At the outset of the Hearing, Mr Simpson presented a Specification of Documents which he invited me to grant with a view to recovering documents to show the legal advice received by Mr Eamer and referred to in his Report at paragraph 2.4, 13.4 and 13.5 The Report had been lodged the previous week; accordingly this was the first opportunity to deal with the matter. It was submitted that the purpose of Specification was to test whether Mr Eamer had accurately represented what he had done and whether he had accurately represented the contents of the advice he stated he had received. Mr Simpson made various submissions on legal privilege and submitted that privilege had been waived; he referred to Wylie v Wylie 1967 SLT (Notes) 9, Duke of Argyll v Duchess of Argyll 1962 SC (HL) 88 at 89, 94 and 97, and Barclay v Morris 1997 SC 74 at 79E.
23. Mr Thomson opposed the application. He submitted that the material sought was privileged and there was no question of waiving privilege; the application was in any event irrelevant; and lastly, it was a fishing diligence.
24. After a brief adjournment, I refused the application. It seemed to me that the underlying purpose of the application was misconceived and irrelevant. At paragraph 2.4 of his Report, Mr Eamer states inter alia:-

I have sought and received legal advice as to whether or not the options to convert the loans had prescribed................. The advice I have received is that there is no reason to believe that the options had prescribed and in consequence they were capable of exercise as at the date of death

25. Section 13 of his Report contains his "Expert's Declaration". At paragraph 13.4 he states that he has indicated all the source of information he has used. At paragraph 13.5 he states:-

I have not without forming an independent view included or excluded anything which has been suggested to me by others (particularly my instructing lawyers)

26. The theme underlying the Appellants' argument was that Mr Eamer had sought legal advice from a source other than HMRC and therefore the Appellants were entitled to details of it. It was said that the details might affect Mr Eamer's reliability. While such an interpretation of Mr Eamer's Report is just possible, it seems to me to be unlikely. In any event, Mr Eamer's report provides expert evidence on valuation. He does not express his own view on the law of prescription. Like most experts, he makes his valuation on the basis of certain assumptions; some are assumptions of fact and some are assumptions of law. If the assumptions of law (or fact) upon which he proceeds are material to his valuation and erroneous, then the reliability of his valuation is liable to be, at least, called into question. It does not matter what the source of the assumption of law (or fact) is. The issue is whether the assumptions he has made are sound. If not, then the correctness of the valuation may be prejudiced. For that reason, experts frequently hedge their bets by expressing their opinion based on alternative views of the law. This is perfectly acceptable and is often mirrored in written pleadings in litigation where an esto case is advanced.
27. In the foregoing circumstances, I took the view that the application was irrelevant and I refused it. It is unnecessary to consider the question of privilege in any detail. In my view, the argument that privilege had been waived, insofar as relevant at all, was also unsound. It was not suggested that Mr Eamer had authority to waive privilege on behalf of HMRC. It is clutching at straws to suggest that Mr Eamer is the client. The cases cited were either so different on their facts or dealt with aspects of the law of confidentiality and waiver which had little bearing on the point being discussed that I found them to be of little assistance to me. The rationale of the decision in Wylie was that it would be unfair if the pursuer were to be entitled to support his case by reference to one letter passing between him and his solicitor while at the same time pleading confidentiality of other such letters dealing with the question in issue in the action. It is unnecessary, too, to express a view on the competency of an application for diligence against a third party for recovery of documents. It is also unnecessary to contemplate how the considerable practical inconvenience to the expeditious and efficient disposal of these proceedings would have been managed had the application been granted.
28. Finally, I record that when Mr Eamer subsequently gave evidence, he confirmed that the source of the legal advice recorded at paragraph 2.4 of his Report was HMRC Solicitor's office. I accept that evidence.

Facts

29. Parties produced an Agreed Statement of Facts which are not in dispute. It begins with a statement that unless expressly or impliedly to the contrary, the facts are stated as at the time of Ian Campbell MacArthur's death. Any reference to 'the deceased' therein is a reference to Ian Campbell MacArthur. The text of the agreed facts is in the following terms:-
30. Ian Campbell MacArthur died on 14th July 1994.
31. Ian Campbell MacArthur was the son of Col MacArthur, who died on 17 November 1973.
32. Marie Maxwell is the deceased's sister.
33. C. MacArthur is the deceased's son.
34. The deceased's estate on death included at least the following assets:

(i) Cape Wrath Hotel Company Limited ('Cape Wrath'):

670 £1 Ordinary Shares

(ii) Chapman of Inverness Limited ('Chapman'):

a) 2,375 £1 Ordinary Shares

b) 2750 £1 7% cumulative preference shares

c) Loan of £4,900

(iii) New Inverness Laundry Company Limited ('New Inverness'):

a) 991 £1 Ordinary Shares

b) 2172 £1 6% cumulative preference shares

c) Loans of, in aggregate, £8,000

II. Cape Wrath Hotel Company Limited

35. The total issued share capital of Cape Wrath was 2,500 £1 Ordinary Shares.
36. Accordingly, Mr MacArthur's shareholding of 670 was approximately 26.8% of Cape Wrath's issued ordinary share capital.
37. All the remaining shares in Cape Wrath were in the beneficial ownership of members of his family, namely his sister, his son and his nephew and also a Mrs Carena Joan Campbell.
38. The business of Cape Wrath was investment, mainly quoted investments and it also owned a hotel which had formerly been its main business. This was the Cape Wrath Hotel, Keoldale, Durness, Sutherland. The hotel was occupied and run by a third party. There was a long-running dispute between Cape Wrath and the third party concerning in particular claims by the third party for compensation for improvements the third party had made to the hotel over a period of ten years. Over that period there had been unconcluded missives for the sale of the Hotel to the third party. These issues were finally resolved and missives concluded with settlement of the sale eventually concluding in December 1996. Save for the hotel premises the assets of the company were largely liquid in nature, comprising the aforementioned quoted investments and cash.
39. The ordinary shares in Cape Wrath should be valued for the purposes of section 160 of the Inheritance Tax Act 1984 on an assets basis.
40. The assets of Cape Wrath included 1,050 £1 Ordinary Shares in New Inverness. This constituted 30% of the issued ordinary share capital in New Inverness, the total being 3500. Excluding its shareholding in New Inverness, the value of Cape Wrath as a whole, so far as attributable to ordinary shareholders, was £542,226.
41. Mr MacArthur and others had made certain loans to New Inverness.
42. If all loans due by New Inverness were convertible into £1 ordinary shares in New Inverness, one share for every £1 of loan, and if those loans were in fact converted into ordinary share capital in that company, Cape Wrath's holding of 1,050 ordinary shares in New Inverness would constitute only 8.15% of the issued ordinary share capital in New Inverness. If only the deceased's loans were converted, it would constitute 9.13%.
43. Net dividends paid by Cape Wrath to ordinary shareholders in each of recent years were, in aggregate in each year, £8,040 net.

III. Chapman

44. The total ordinary issued share capital of Chapman was 8,000 £1 Ordinary Shares.
45. Accordingly, Mr MacArthur's shareholding of 2375 was approximately 29.7% of Chapman's issued ordinary share capital.
46. All the remaining ordinary shares in Chapman were held by members of Mr MacArthur's family. His son owned 2100 and his sister owned 1775. The remaining 1750 were owned by the trustees of Mrs M C Maxwell discretionary trust.
47. The business of Chapman was investment. The investments it held were principally quoted securities. It also owned a former garage premises and workshop. The garage premises were rented out but sold in 1995. The workshop was also rented out and sold in 2005. Save for the garage and workshop, the assets of this company were largely liquid in nature, comprising quoted assets and cash.
48. The ordinary shares in Chapman should be valued for the purposes of section 160 of the Inheritance Tax Act 1984 on an assets basis.
49. The assets of Chapman included 400 £1 Ordinary Shares in New Inverness. This constituted 11.4% of the issued ordinary share capital in New Inverness. Excluding this shareholding in New Inverness, the value of Chapman as a whole, so far as attributable to ordinary shareholders, was £744,994.
50. Mr MacArthur and others had made certain loans to New Inverness.
51. If the loans due by New Inverness were convertible, and if those loans were in fact converted into ordinary share capital in that company, Chapman's holding of 400 ordinary shares in New Inverness would constitute only 3.1% of the issued ordinary share capital in New Inverness. If only the deceased's loans were converted it would constitute 3.47%.
52. There were also 3700 £1 cumulative preference shares issued in Chapman. Mr MacArthur owned 2,750 of these. The value of these has been agreed at 50 p per share, by correspondence dated 10th May 1996 by Ian MacDonald to the Capital Taxes Office and 23rd September 1996 by J. Telford to Ian MacDonald.
53. Of the £4,900 lent by Mr MacArthur to Chapman, £1,400 never carried any option to convert the amount outstanding into shares in Chapman.
54. As regards the remaining £3,500, this was granted by Mr MacArthur to Chapman on or around 13th April 1973. The loan was repayable on demand.
55. At the time this £3,500 was lent by Mr MacArthur to Chapman, Chapman conferred on Mr MacArthur an option to convert this amount into £1 Ordinary Shares in Chapman at par as a substitute for repayment in cash.
56. Prior to his death Mr Ian Campbell MacArthur had not made a demand for repayment of the loan.
57. Prior to his death Mr MacArthur had not exercised any option to convert the loan into ordinary shares.
58. Chapman's accounts for the years ended 31^st October 1979, and for all subsequent years up to Mr MacArthur's death, include a note in relation to the loan that, 'The Lenders have an option for an indefinite period to convert the Loan of £3,500 into additional Ordinary Shares at Par.' No such note appears in the accounts for the years ended 31^st October 1974, 1975, 1976, 1977 and 1978.
59. Chapman could choose to tender repayment of this loan in cash at any time, but if the lender validly exercised any option to convert the loan into ordinary share capital then Chapman would be required to issue the ordinary shares in place of the obligation to repay in cash.
60. Chapman had not tendered repayment to Mr MacArthur prior to his death.
61. In the years ending, respectively, 31st October 1991, 31st October 1992 and 31st October 1993, Chapman had paid a dividend of 10p, £1 and £1, in each case net of tax, on each of its issued ordinary shares.
62. Had the deceased, immediately before his death, chosen to exercise such options in respect of his loans to Chapman up to the total option amount (£3500) he would have increased his holding of 2375 ordinary shares to 5875 giving him 51.09% of the increased issued ordinary share capital (11,500).
63. In or about April 1995 the executors of the deceased exercised an option to be issued with 3500 ordinary shares in Chapman in respect of the deceased's loan of £3500. The directors of Chapman complied with the exercise of the option and issued the executors with 3500 £1 ordinary shares, fully paid. The shares were allotted on 26 April 1995 and agents acting for the company made the requisite return to the Registrar of Companies declaring the consideration for which the shares were allotted to be "conversion of loan of £3500 to the company by late Ian Campbell MacArthur". The executry thereby increased its total holding to 51.09% of the issued ordinary share capital.

IV. New Inverness

64. The total issued ordinary share capital of New Inverness was 3,500 £1 Ordinary Shares. The authorised ordinary share capital of the company was 6500 such shares.
65. Accordingly, Mr MacArthur's shareholding was approximately 28.3% of New Inverness' issued ordinary share capital.
66. The other ordinary shareholders in New Inverness were members of Mr MacArthur's family, Cape Wrath and Chapman.
67. There were also 3000 £1 cumulative preference shares issued in New Inverness. Mr MacArthur owned 2,172 of these. The value of these has been agreed at 45p per share, per number 16(b) of Schedule 2 to CAP Form 3 dated 11th October 1994 and letter by R Dunbar to Ian MacDonald dated 31st January 1995. The authorised cumulative preference share capital was 3500.
68. The loan of £8,000 was the aggregate of the following loans granted by Mr MacArthur to New Inverness:

i) £500 on 9th April 1962 bearing interest at 6% per annum;

ii) £250 on 13th August 1963 bearing interest at 6% per annum;

iii) £1,500 on 10th July 1967 bearing interest at 8% per annum;

iv) £5,000 on 27th March 1974 bearing interest at 14% per annum; and

v) £750 acquired from the estate of Colonel N MacArthur in or around November 1973.

69. In addition, others had granted loans to New Inverness which remain outstanding. There remained outstanding the other half share in Colonel MacArthur's debt of which the deceased's sister had the beneficial interest (£750). C. MacArthur, the deceased's son, was owed £620.70. Together the debts due to the deceased, his sister and son as hereinbefore set out totalled £9,370.70 which equated to the sum of £9,370 stated in the company accounts in at least the years 1992, 1993 and 1994.
70. As regards the loans mentioned in paragraph 39 i) and ii), on 11th September 1963 New Inverness conferred on Mr MacArthur an option to convert them into £1 Ordinary Shares in New Inverness at par as a substitute for repayment in cash.
71. As regards the mentioned in paragraph 39 iii) and iv), when the loans were made New Inverness conferred on Mr MacArthur an option to convert them into £1 Ordinary Shares in New Inverness at par as a substitute for repayment in cash.
72. As regards the loan mentioned in paragraph 39 v), this consisted in one half of a loan of £1,000 granted by Colonel MacArthur to New Inverness on 24th August 1966, and of one half of a loan of £500 granted by Colonel MacArthur to New Inverness on 14th September 1968. The latter loan was originally in the amount of £600, but £100 had been repaid prior to Colonel MacArthur's death. When these loans were made New Inverness conferred on Colonel MacArthur an option to convert them into £1 Ordinary Shares in New Inverness at par.
73. New Inverness' accounts for the years ended 31st March 1983, and for all subsequent years from 1983 up to Mr MacArthur's death, included a note in relation to the loans that, 'The lenders have an option to convert these loans into additional share capital [or 'ordinary shares'] at par.' The accounts for the years ended 31st March 1975 to 31st March 1982 did not include that note, or any note to equivalent effect.
74. Prior to his death Mr MacArthur had not made a demand for repayment of any of the loans.
75. Prior to his death Mr MacArthur had not exercised any option to convert these loans into ordinary shares.
76. With respect to the further £1370.70 in loans to New Inverness outstanding at the date of Mr MacArthur's death in which Marie Maxwell and C. MacArthur were the creditors, at the time these loans were granted, the lenders were given the option to convert these loans into £1 Ordinary Shares in New Inverness at par.
77. Prior to Mr MacArthur's death, no creditor in the debts amounting to £1370.70 had exercised any options to convert those loans into ordinary shares.
78. New Inverness could choose to tender repayment of any or all of the £9,370.70 in cash at any time, but if the lender validly exercised any option to convert his loan into ordinary share capital then New Inverness would be required to issue the ordinary shares in place of the obligation to repay in cash.
79. New Inverness had not tendered repayment to Mr MacArthur prior to his death, nor had it done so to those other creditors.
80. Had the deceased, immediately before his death, chosen to exercise such options in respect of his loans to New Inverness up to the total option amount (£8,000) and had others with such options also opted to do so to their limits (£1370) he would have increased his holding of 991 ordinary shares to 8991 giving him 69.8% of the increased issued ordinary share capital (12,870).
81. The business of New Inverness was investment. The investments it held were principally quoted securities. The assets of the company were essentially liquid in nature comprising quoted assets and cash.
82. The ordinary shares in New Inverness should be valued for the purposes of section 160 of the Inheritance Tax Act 1984 on an assets basis.
83. On the assumption that the loans to New Inverness were convertible into £1 Ordinary Shares in that company, and if those loans were in fact converted, the value of that company as a whole, so far as attributable to ordinary shareholders, was £482,433.
84. So long as the loans to New Inverness were not converted into ordinary share capital (whether because they were not so convertible or because, although convertible, the right to convert them had not been exercised), the value of that company as a whole, so far as attributable to ordinary shareholders, was £473,063.
85. In the years ending, respectively, 31st March 1992, 31st March 1993 and 31st March 1994, New Inverness had paid a dividend of £7, £5 and £1, in each case net of tax, on each of its issued ordinary shares.
86. Had the deceased, immediately before his death, chosen to exercise such options in respect of his loans to New Inverness up to the total thereof (£8,000) he could have done so as follows:

(a). …

(i). there being 3000 authorised but unissued ordinary shares and 500 authorised but unissued preference shares; and

(ii). article 34 of the company's articles of association allowing for increase in the authorised share capital by ordinary resolution; and

(iii). an extraordinary resolution of the members on 21 March 1940 having increased the nominal ordinary share capital and having made provision for protection of preference holders' rights, beyond the further issue of 2000 shares, one preference share being required to be issued for every two ordinary shares; accordingly

(iv). the 3000 ordinary shares could have been issued with the consequent issue of 500 preference shares without any increase in the nominal share capital; and further

(v). as the deceased himself owed 2172 of the existing preference shares, of the 500 new preference shares he would have been entitled to receive, and would have received, 362; thereupon

(vi). an ordinary a resolution would have been required to increase the authorised share capital of the business;

(vii). said ordinary resolution would have been passed on the basis that in respect of such a resolution ordinary shareholders and preference shareholders each had one vote per share; accordingly

(viii). the deceased would have had 6525 votes ((991+3000) ordinary shares plus (2172+362) preference shares) of total available votes of 10,000 (6500 ordinary and 3500 preference) giving 65.25% of the vote, a clear majority;

(ix). the ordinary resolution would have been done on the basis that ordinary and preference share capital be increased proportionately so as to allow for the issue of preference shares at 1 for 2;

(x). thus the authorised share capital would have been increased by at least a further 5000 ordinary shares and 2500 preference shares, bringing the nominal capital to 11,500 and 6000 respectively;

(xi). once the resolution was passed the deceased would have required the directors to allot him a further 5000 ordinary shares and he would have been allotted a proportion of the additional 2500 preference shares, namely 1551 (2500x2172/3500), that giving him 8991 ordinary shares of 11,500 issued, a holding of 78.18% of the ordinary issued share capital; alternatively

(b). …

(i). it is possible that upon the deceased seeking to exercise his options the other lenders with similar rights would have sought to do the same;

(ii). if so, and on the hypothesis that they were able to do so, the following would have occurred;

(iii). there being 3000 authorised but unissued ordinary shares and 500 authorised but unissued preference shares; and

(iv). article 34 of the company's articles of association allowing for increase in the authorised share capital by ordinary resolution; and

(v). an extraordinary resolution of the members on 21 March 1940 having increased the nominal ordinary share capital and having making provision for protection of preference holders' rights, beyond the further issue of 2000 shares, one preference share being required to be issued for every two ordinary shares; accordingly

(vi). the 3000 ordinary shares could have been issued with the consequent issue of 500 preference shares without any increase in the nominal share capital; and further

(vii). on the hypothesis that the shares available for allocation would have been divided proportionately among those seeking to exercise options rather than on a first come first served basis, the deceased would have received 2561 ordinary shares (3000x 8000/9371) and 362 (500x 2172/3000) preference shares, with the other creditors receiving 439 ordinary shares and 138 preference shares; thereupon

(viii). an ordinary a resolution would have been required to increase the authorised share capital of the business;

(ix). said ordinary resolution would have been passed on the basis that in respect of such a resolution ordinary shareholders and preference shareholders each had one vote per share; accordingly

(x). the deceased would have had 6086 votes ((991+ 2561) ordinary shares plus (2172+362) preference shares) of total available votes of 10,000 (6500 ordinary and 3500 preference) giving 60.86% of the vote, a clear majority;

(xi). the ordinary resolution would have been done on the basis that ordinary and preference share capital be increased proportionately so as to allow for the issue of preference shares at 1 for 2;

(xii). thus the authorised share capital would have been increased by at least a further 6371 ordinary shares and 3186 preference shares, bringing the nominal capital to 12,871 and 6686 respectively;

(xiii). once the resolution was passed the deceased would have required the directors to allot him a further 5439 (8000 -2561) ordinary shares and he would have been allotted a proportion of the 3185 additional preference shares, namely 1976 of them (3185x2172/3500), that giving him 8991 ordinary shares of 12,871 issued, a holding of 69.85% of the ordinary issued share capital; alternatively

(c). …

(i). knowing that the deceased could accomplish allotment of his options in one or other of the aforesaid manners, the other shareholders would have co-operated in accomplishing the same end result by the shareholders resolving to increase the nominal share capital at the outset and the directors making share allocations in only one stage; alternatively

(d). …

(i). even if issue of further shares beyond the existing authorised share capital could be blocked:

(ii). if the deceased had opted to implement his option to the available limit and if other creditors had chosen not to do so or had been unable to do so by reason of the deceased's prior exercise, he would have been issued with 3000 further ordinary shares increasing his holding to 3991 of the then total issued ordinary share capital of 6500, giving him 61.4% of the ordinary share capital; alternatively

(iii). if the deceased had opted to implement his option to the available limit and if other creditors had chosen also to do so and been able to do so pro rata, the deceased would have been issued with a further 2561 ordinary shares giving him a total of 3552 shares, a holding representing 54% of the ordinary share capital; and accordingly

(e). …

(i). given the foregoing and the deceased obtaining a majority holding of the ordinary share capital no matter what happened, all interests in the company would have co-operated in order to accomplish the due implementation of the options to their full extent.

59 The hypothetical purchaser of shares, loans and options immediately prior to the death of Mr MacArthur would have been in a similar position to that set out in the preceding paragraph in relation to the capital structure of the companies and the means by which he could seek to achieve implementation of an exercise of any options.

87. From the evidence led and documents produced, I find the following additional facts admitted or established:-
88. In the annual accounts for New Inverness for the years 1989-94 there is in relation to the loans with which these proceedings are concerned, the following statement:-

"The Lenders have an option to convert these Loans into additional Ordinary Shares at par."

89. In the annual accounts for New Inverness for the years 1983-88 there is in relation to the loans with which these proceedings are concerned, the following statement:-

"The Lenders have an option to convert these Loans into additional share capital at par."

90. In the annual accounts for New Inverness for the years 1981-82 there is in relation to the loans with which these proceedings are concerned, the following statement:-

"Loans from Directors from which there is no fixed term of repayment"

91. In the annual accounts for New Inverness for the years 1978-81 there is in relation to the loans with which these proceedings are concerned, the following statement:-

"Loans from Directors from which there is no fixed term of repayment"

Interest rates vary from 6% to 9%"

92. In the annual accounts for New Inverness for the year 1977 there is in relation to the loans with which these proceedings are concerned, the following statement:-

"Loans from Directors from which there is no fixed time of repayment"

Interest rates vary from 6% to 9%"

93. In the annual accounts for New Inverness for the years 1975-76 there is in relation to the loans with which these proceedings are concerned, the following statement:-

"Loans from Directors from which there is no fixed time of repayment"

Findings 60-64 supplement paragraph 44 above.

94. The Minutes of the meeting of the Directors of Chapman held on 19/2/73 stated inter alia:-

"It was agreed that the Company should borrow £4,000, repayable on demand on which interest should run at 10% from I. C. MacArthur and that the latter should have an option to convert his loans at any time into shares of the Company at the rate of £1 per ordinary share"

95. The Minutes of the meeting of the Directors of Chapman held on 13/4/73 contained the same statement in relation to a further loan of £3,500 from the deceased.
96. The Minutes of the meeting of the Directors of Chapman held on 18^th October 1973 stated inter alia-

"It was agreed that the Company should borrow £6,000 repayable on demand on which interest should run at 14% from I, C. Macarthur and that the latter should have an option to convert his loan at any time into shares of the Company at the rate of £1 per ordinary share.

It was also agreed that interest should run at 14% on the loans of £3,500 and £4,000 made by I. C. MacArthur to the Company conform to Minutes of 13^th April and 19^th February both 1973, with effect from this date."

97. These loans of £6000 and £4000 referred to in paragraphs 66 and 68 were, for one reason or another, not outstanding at the deceased's death. The loans were either never made or were repaid. In Chapman's balance sheet for the year ended 31/10/93 inter alia the following is noted:-

"Loan from Director at 14% £3,500

...........................................

The Loans are unsecured and payable on demand.

The Lenders have an option for an indefinite period to convert the Loan of £3,500 into additional Ordinary Shares at par."

98. The balance sheet in Chapman's accounts for each of the years between 1992 and 1981 contains an identical statement. The Director referred to above was the deceased. For the year to 31/10/80, and the year to 31/10/79 instead of "Loan from Director" the heading "LOANS" appears beneath which are the words "I.C. MacArthur Esq. At 14% £3,500"; the remaining text is identical. For the years 1978 and 1977 the amount of the loan and rate of interest are the same but the text simply states "The Loans are unsecured and payable on demand". For the year 1976 the only difference is that the text states that "The Loans are repayable on demand". The years 1975 and 1974 simply state "repayable on demand". The 1973 Accounts are in the following terms:-

"I.C. MacArthur @ 14% repayable on demand £7,500

I.C. MacArthur @ 14% repayable on demand £6,000

I.C. MacArthur @ 9% repayable on demand £1,400

.................................

The lenders have an option for an indefinite period to convert £16,300 into additional Ordinary Share Capital at par."

This finding and paragraphs 66- 69 supplements paragraph 29 above

99. Mr Andrew Todd is an experienced corporate lawyer. He qualified as a solicitor in 1989 and became a partner in Dickson Minto WS, Edinburgh and London in 1995. Dickson Minto WS are a leading firm of solicitors specialising in corporate law. He was instructed by the Appellants to explain the pre-acquisition, legal due diligence procedure which would be undertaken by a prudent purchaser of a loan, convertible into shares in a private limited company. In a signed statement dated 8/4/08, he expressed the view that the borrower could without notice repay the Chapman or New Inverness loans, which might have the effect of defeating an unexercised conversion right or an exercised but uncompleted conversion. He emphasised that point in evidence. He assessed the risk of the New Inverness loans being repaid before conversion could be effected as very high because of the need to create additional share capital; this process could take several weeks during which period the loans could be repaid and the conversion rights defeated. He considered that a legal due diligence review would question whether the conversion rights had prescribed. The views of Mr David Johnston Q.C., expressed in an Opinion dated 28/2/03 and recorded in a subsequent note of a consultation with him, would not dispel the reasonable concerns of a prudent purchaser.
100. Mr Todd produced two comprehensive styles; one, Heads of Terms for a Convertible Loan Note; the other a Convertible Loan Note Instrument (the latter running to some 20 pages). He would have expected to see similar documents in the mid Nineties. He was somewhat critical of the documentation in the books and records of New Inverness and Chapman.
101. Following a leading question designed to have Mr Todd state that no value would be placed on the various conversion rights (which was objected to and withdrawn), Mr Todd stated that it was difficult to see a prudent purchaser buying on an as if converted basis given what he described as the defects.
102. The deceased was senior partner of the firm of MacArthur & Co. However, his principal involvement with the firm (at least in his later years) related to the running of the MacArthur family companies which included New Inverness, Cape Wrath and Chapman. The deceased effectively ran the companies, dealing with both the legal and practical sides of management including dividend policy and directors' fees. He dictated investment policy in consultation with stockbrokers. He had done so since at least the early nineteen seventies. He signed the companies' accounts. Members of his family made no practical contribution to the management of the family companies. In particular, the deceased's son, showed limited interest in the companies and had virtually no involvement in their management. He held 200 ordinary shares in Cape Wrath; 2100 ordinary shares in Chapman, and 1000 ordinary shares and 200 preference shares in New Inverness, all as at the date of the deceased's death. He was appointed a director in each company following his grandfather's death in 1973. He was unaware of the existence of the option rights and rarely attended board meetings or AGMs. Had there been an actual attempt to sell the deceased's shares and option rights to a third party, Mr MacArthur would have been hostile to this, but would have taken and would have been guided by professional advice.
103. Mr MacDonald became involved in the administration of these companies to some extent in the early nineties. However, he essentially carried out the deceased's instructions rather than applying his own mind to the company's affairs. After the deceased's death, Mr Macdonald became a director of New Inverness and Cape Wrath.
104. Chapman was the main Ford Dealer in Inverness selling and repairing cars, and commercial and agricultural vehicles. It owned a variety of properties in Inverness, some of which were let out. Cape Wrath owned and operated a hotel. New Inverness operated a laundry. The companies achieved a relatively small profit. Funds for capital investment for the provision of equipment were usually provided by directors' loans, mainly from the deceased, sometimes with and sometimes without an option to convert the loans into shares.
105. Eventually, the businesses were sold or came to an end in the seventies or eighties. The hotel was let, and subsequently sold in 1996. They thus ceased to be trading companies and became investment companies. They then, through the business acumen of the deceased, became more profitable and their value grew.
106. A meeting took place between the Appellants and HMRC on or about 23 August 2002. Ian MacDonald, Bruce Sutherland, David Bennett (a partner in Bennett & Robertson) and Mr Stuart Merry of Robertson Craig & Co (an accountant who had also given the Appellants advice) attended the meeting on behalf of the Appellants. Peter Twiddy, then Assistant Director Technical Services, Mrs Ann Pissaridou, litigation specialist and several others attended on behalf of HMRC. Mr MacDonald thought the purpose of the meeting was to negotiate a settlement. At the meeting Mr Twiddy inter alia referred to the question of uncertainty involved in converting the loans. Mr Macdonald took handwritten notes which were typed up. A typewritten note was also prepared by HMRC. Neither party circulated their record of the meeting to the other. It is apparent from the Notes and from Mr Macdonald's evidence that questions relating to the vouching of the loans, the options to convert and prescription were all discussed without any agreement being reached or any significant progress being made to identify an agreed basis for valuation of the relevant parts of the deceased's estate. Neither side made any irrevocable concession.
107. By letter dated 9/1/03, Messrs Bennett & Robertson LLP, solicitors, Edinburgh instructed David Johnston, (then) Advocate (now Q.C.) on behalf of the Appellants. A Memorial, prepared by Bennett & Robertson and revised by Mr MacDonald, set out the background and requested an opinion on inter alia whether the principal sums, the right to interest and the right to convert had prescribed. Mr Johnston, in a written Opinion dated 28/2/03, expressed the view that (i) the loans had not prescribed, (ii) the claims for interest had not prescribed by the date of the deceased's death, and (iii) that the right to convert had not prescribed. He described the last matter as a delicate one but set forth a clear statement of the reasons for his view. He considered that the debtor was under a single obligation which, at the option of the creditor, might be discharged in one of two ways. Prescription ran in relation to the right to convert just as it would with respect to the obligation to pay.
108. A consultation was held with Mr Johnston on 12/5/03. Mr Sutherland, Mr MacDonald and John Stirling (a partner in Bennett & Robertson) attended the consultation. A typewritten Note of that consultation was made. It appears from that Note that Mr Sutherland took the lead at the consultation. Among other things, the Note discloses that Mr Johnston affirmed the views expressed in his Opinion. The Note also records that while acknowledging that it was likely that judges might differ in their views on the question, Mr Johnston considered that it would be unlikely that a court would construe the rights attached to the loan in such a way as to allow the companies to avoid the obligation to convert; doing so would be a fraud on the offer of the right. The Opinion was not at that stage intimated to HMRC.
109. By letter dated 15/1/04, Mr Sutherland sent a copy of the Opinion to HMRC.
110. On or about 17^th September 2004, Messrs Bennett & Robertson LLP sent a copy of the Consultation Note to Mr Johnston and asked him to confirm its accuracy. Not surprisingly, having regard to the passage of time, Mr Johnston did not, in terms, confirm its accuracy. He provided a Note dated 21/9/04 in which he stated that he had taken the view that certain rights had not prescribed but that there was room for doubt.
111. At or immediately prior to the deceased's death, it is a matter of agreement between the parties that the net assets of the following companies had the following values:-

"Cape Wrath £542,226*

Chapman £744,944**

New Inverness £482,433

*This sum does not include the value of 1052 £1 Ordinary shares of New Inverness held by Cape Wrath.

**This sum does not include the value of 400 £1 Ordinary Shares of New Inverness held by Chapman.

These findings clarify paragraphs 11, 20, and 55

Submissions

112. Mr Simpson for the Appellants in his Skeleton Argument set out general valuation principles under reference to well known authorities. He submitted that the options or "conversion rights" as he described them, had prescribed as they became enforceable when granted and not when a demand for repayment was made; there was, at the very least, a real doubt about the question of prescription which falls to be taken into account by the prudent hypothetical purchaser. The Options were not variations of the loans. There were further doubts as to whether the conversion rights could be defeated by the tender of payment even after notice intimating exercise of the options; and whether the loans themselves could be proved to have existed. All this would affect valuation. There was a theoretical middle ground between "doubts" and "no doubts" but this led, so the argument ran, to the same result as if the rights had prescribed i.e. the conversion rights were worth nothing.
113. On the general approach to valuation he referred to sections 4(1), 160, and 168 of the 1984 Act, and to the following authorities, AG v Jamison 1905 IR 218 at 221, 222, 224, 225 and 226, Duke of Buccleugh v IRC 1967 AC 507 at 524 B-D, 525A and G and 546, IRC v Gray 1994 STC 360 at 371, In re Lynall 1968 47 TC 375 at 386, 389-90, 392, 400, Holt v IRC 1953 1 WLR 1488 at 1492, and 1501, Salvesen's Trs v Jamison 1930 SLT 387 and 1930 7 ATC 43 at 46, 47, 54, In re Thornley 1928 7 ATC 178 at 181, In re Courthope 1928 7 AC 538, Caton v Couch 1995 STC (SCD) 34, Walton v IRC 1996 STC 68 at 85-86 and 89J, and Trocette Property Co Ltd v GLC 1974 28 P&CR 408 at 415, and 416.
114. In the real world it was very unlikely that anyone would buy the conversion rights; these rights must be assumed to be doubtful. The purchaser would be a hostile intruder. The interests of the existing shareholders would be diametrically opposed to those of the prospective purchaser. The anticipated reaction of third parties can be taken into account.
115. Mr Simpson submitted that the following were relevant factors to be taken into account:-
116. (i) the assets of the companies in question were mainly quoted investments; there was thus nothing special about these companies; so the difficulties a buyer would face with the other shareholders and with the conversion rights will be exaggerated; according to Mr Sutherland this was something he would take into account.
117. (ii) each company had restrictions on its shares in terms of the Articles of Association.
118. (iii) the hostility one could reasonably expect from the existing shareholders whose interests in New Inverness and Chapman were diametrically opposed to any purchaser; so they would do what they could to resist the exercise of the conversion rights.
119. (iv) the uncertainty as to whether the conversion rights had prescribed. This coupled with the question whether the conversion rights could be defeated by tender of repayment were matters relied upon by Mr Todd for his conclusion that a prudent purchaser would insist on these matters being rectified as a precondition of any purchase that placed a value on the loans and their conversion rights which exceeded the nominal amounts of the loans plus accrued interest. He was an experienced "corporate" solicitor in a "top flight" firm; his evidence was uncontradicted. There was therefore a risk that what would be acquired would be valueless. Mr Simpson referred to Green's Encyclopaedia of Legal Styles 1954 vol 3 page 318 style 269, for the proposition that the fundamentals alluded to by Mr Todd were well known in Scots Law, and that thus the manner of recording rights was unconventional and unsatisfactory.
120. (v) the borrower i.e. the companies could repay the loans at any time; there was therefore a risk that the options could be defeated.
121. Mr Simpson went on to argue that the Options had prescribed. He submitted that Schedule 2 paragraph 2(2)(b) of the 1973 Act did not apply to the Options; one was therefore thrown back to section 6(3) of the 1973 Act which is the date on which the obligation became enforceable. There was no direct evidence of the terms of the Options which must have been entered into orally. He referred to Von Mehren & Co v Edinburgh Roperies and Sailcloth Ltd 1901 4 F 232 at 238 and 240. It was not necessary for a demand in the form of a notice of conversion to be made before prescription started to run. When asked what obligation was enforceable without such a demand or notice he submitted that the obligation was "to be prepared to issue shares". He submitted that the options had to be exercised within a reasonable time and this had not been done. He referred to Reardon Smith Line Ltd v Ministry of Agriculture 1963 AC 691 at 731 and 732. He sought to elide the use of the phrase at any time in the accounts as subsequent conduct which fell to be ignored in construing a contract (James Miller & Partners v Whitworth Estates Ltd 1970 AC 583). Thus, the Opinion of David Johnston Q.C. was wrong, but, in any event, having regard to its terms and the Note of the Consultation would have been sufficient to create a reasonable doubt in the mind of the hypothetical purchaser.
122. Mr Simpson also submitted that the fact that the deceased's loans to New Inverness were subsequently converted into shares is irrelevant because one considers only information available at the time of death and subsequent events cannot be taken into account (Holt v IRC 1953 1 WLR 1488 at 1492; Salvesen's Trs v CIR 1930 ATC 43 at 47 and 52ff)
123. On the question of valuation, Mr Simpson submitted that there were three hypotheses upon which a valuation should proceed, namely that (i) the conversion rights had prescribed, (ii) the conversion rights had not prescribed, and (iii) there were doubts about the conversion rights and various other matters. He adopted and amplified the factors referred to in Appendix 7 to Mr Sutherland' Report. Mr Eamer, he suggested, had accepted in cross-examination that further discount would be appropriate on the basis of Mr Todd's evidence in particular, and because of his view that there was a less than 50% chance that the transaction would proceed; this according to Mr Simpson led Mr Eamer to accept that a further reduction in his valuation of about 5-10% was appropriate. However, this was far too low. The uncertainties require that the cost of litigation be taken into account which he suggested should be £60,000.
124. The valuations should also be reduced, said Mr Simpson, to reflect the tax disadvantages of unquoted companies compared with quoted or listed companies. Mr Eamer's figure was 2.5%.
125. The result was that the prudent purchaser would pay nothing for the Options.
126. Mr Thomson for HMRC produced a lengthy written submission to which he spoke and amplified. In summary, he submitted that while the witnesses should overall be regarded as credible, Mr Sutherland's evidence should not be treated as generally reliable (I consider this submission below when assessing the valuation evidence). As to the evidence he submitted (i) a pattern of loans with options was established from the documents on terms similar to those under consideration in this appeal; (ii) the options to take shares in substitution for repayment in cash were part and parcel of the loan obligations or a variation of them; there was overwhelming evidence to support their existence and enforceability; the books and records of the companies (writs of the companies) supported this and both Neil Macarthur and Ian MacDonald acknowledged and accepted the existence of the loans and options and that the options were not exercised before the deceased died; (iii) paragraphs 13, 22, 26, 30, 33, 34, 41, 42, 49, and 58 of Statement of Facts not in Dispute support such an analysis, as does the fact that the Chapman option was exercised in 1995 (Statement paragraph 34); (iv) Mr Todd's evidence as to what legal advice would be tendered to someone contemplating purchasing the loans/options was irrelevant for various reasons; his evidence was coloured by the absence of formal loan documentation, and his views of the rights of the borrower to thwart the exercise of the options and on prescription were wrong, (v) paragraph 58 of the Agreed Statement discloses that the hypothetical purchaser could have carried the exercise of the options into effect; board hostility and provision in the Articles giving discretion to refuse to register could not prevent this (AG v Jameison 1904 2 IR 644 1905 2 IR 218, CIR v Crossman, In re Holt 1953 1 WLR 1488, Salvesen's Trs v IRC 1930 SLT 387); in any event, the evidence of Neil Macarthur shows that he would have acted rationally and accepted unfavourable legal advice; (vi) no question of the hypothetical purchaser becoming a detested intruder arises (In re Thornley 1928 7 ATC 178).
127. In relation to the prescription argument, Mr Thomson submitted that neither the loans nor the options (if severable) had prescribed before the deceased's death. They were part of the same contract; the option was in effect a mode of repayment. He referred to the Prescription & Limitation (Scotland) Act 1973 section 6(1), (3) and Schedule 2, paragraph 2(2), Bank of Scotland v Laverock 1991 SC 117, and Melham Ltd v Burton 2006 STC 908; nor had the right to interest in respect of the loans prescribed because the interest obligations were for indefinite periods (1973 Act section 6, Schedule 1 paragraph 1(a)(i) and LA v Butt 1992 SC 140). The prescriptive period regarding the loan would only begin upon a demand for repayment or intimation of the exercise of the option. No such demand or intimation had been made. The evidence of and in relation to the Opinion of David Johnston Q.C and the subsequent consultation with him was irrelevant because it was for the Tribunal to determine the issue of prescription. In any event, his written Opinion clearly took the view that the options had not prescribed. The evidence about the consultation was of no value. Mr Johnston did not give evidence.
128. He submitted that interest was not a major issue. All calculations assumed that interest had not prescribed with one exception where parties had agreed that interest was waived. Neither counsel developed any argument on the significance which interest might have on the prescription issue. I therefore do not consider it further.
129. On the question of valuation, Mr Thomson submitted that the existing shares and the options to take further shares fall to be valued as one (IRC v Gray, the Executor of Lady Fox 1994 STC 360 at 373, AG v Mackie 1952 2 AER 775 at 777, Duke of Buccleugh v IRC 1967 1 AC 506); that is the course a prudent hypothetical vendor would have adopted in order to obtain the most favourable price without undue expenditure of time and effort. Sale in the open market had to be assumed; no improvements are to be deemed to have been made prior to sale (AG v Jamison 1905 2 IR 218 at 226, 230, and 240, CIR v Crossman 1937 AC 26 at 54, Duke of Buccleugh at 525, Gray at 372, In re Lynall deceased 1971 47 TC 375 at 406, 408, 409 411 and 412, Caton at 49-50; Salvesen v IRC 1930 SLT 387 at 391, 392. The arguments that the companies were not attractive investments were ill-founded; they were ready-made money-boxes with a history of successful investment, unlikely to give rise to the difficulties of a family trading company; Mr Sutherland's failure to recognise this puts the reliability of his valuation into doubt.
130. Valuation must be carried out without the benefit of hindsight (In re Holt 1953 1WLR 1488 at 1492 and 1493). The hypothetical sale is assumed to take place in the real world (Walton v IRC 1996 STC 68 at 86) insofar as possible (Trocette Property Company Ltd v GIC 1974 28 P&CR 408 at 420). Mr Eamer's deduction of 12.5% for lack of marketability of the majority shareholdings was justified (Goldstein v Levy Gee 2003 EWHC 1574). A discount of 25-40% for a minority holding is common (In re Lynall [28%], Dymond's Capital Taxes paragraph 23.374 [20%], Caton v Couch 1995 STC (SCD) 34 [60-70% -a trading company]). Quoted investment companies typically traded at discounts of around 30%.
131. Mr Thomson accepted that if there were a real and genuine or significant doubt about the enforceability of the option rights that would have genuinely have been in the contemplation of a hypothetical purchaser, then such doubt would fall to be taken into account in the valuation exercise (see e.g. In re Courthope 1928 7 ATC 536). Here, there was no such doubt. The hypothetical purchaser is assumed to make full enquiries and take legal advice; (In re Lynall (deceased) 47 TC 375 at 383, Holt v CIR 1953 1 WLR 1488, Walton v ICR 1996 STC 68, Canton's Administrator v Couch 1995 STC (SCD) 34 at 50). The option could not be defeated before or after its exercise by the borrower choosing to repay the loan in cash; this would negate the notion of an option; the terms of the minutes and the accounts support the view that the option could not be defeated in that way. If there were such doubt then there is no valuation evidence of its effect. Likewise, there was insufficient evidence to justify a further deduction on the basis that the companies in question did not enjoy the same tax benefits as unit trusts or investment trusts. While this matter was raised in the cross examination of Mr Eamer, Mr Sutherland made nothing of this.

Discussion

Identification of the asset to be valued

132. The first task is to identify whether there is an asset to value and, if so, to define what that asset consists of. It may be an asset with a defect such as machinery which regularly breaks down; such an asset is plainly less valuable than the same machine which immediately prior to death was well maintained and seldom broke down. Heritable property with the reasonable prospect of planning permission for residential development (hope value) is more valuable than the same piece of land without any such reasonable prospect and less valuable than the same piece of land to which a grant of planning permission for residential development currently enures. The unit of valuation may also consist of a bundle of rights in the form of shares; or rights under a contract, some plainly enforceable, some prescribed and some questionable.
133. The loans and the conversion rights are recorded in the books and records of the companies (Chapman and New Inverness). It is true that this is an informal method of creating what, in effect, is convertible unsecured loan stock. However, the basic terms of the contracts are clear enough. There is more than sufficient evidence in the form of writs of the debtor to prove the existence of the loans and conversion rights. The law is littered with cases where obligations have been recorded by informal means yet are held to be valid subsisting and enforceable; informal leases for more than one year and the sale of heritage provide classic illustrations of such informality and enforceability.
134. The terms of these contracts need to be considered. Mr Simpson argued that it was implied that the Options would be exercised within a reasonable time. In my opinion, it is not necessary to imply such a term to give these contracts business efficacy. Nor is such a term an inherent part of the contract which enables the creditor to take shares instead of the sum advanced. The right to take shares i.e. to convert the loan into stock, is a contractually stipulated substitute for the right to demand repayment of the sums borrowed. It made no difference to the debtor how long the creditor waited before demanding repayment or exercising the option to take shares in lieu of repayment. It had no bearing on the debtor's ability to perform. The dicta in Reardon Smith (which concerned the construction of a charterparty), relied upon by Mr Simpson, do not assist the Appellants. Lord Devlin, (1963 AC at 732) makes it clear that the calculation of the reasonable time is made by reference to any action to be taken under the contract, the nature of which action depends on whether the option has been exercised.
135. Of perhaps more significance is the terms of the companies' writs evidencing the terms of the options to convert. In some of the New Inverness accounts, reference is made to there being no fixed term of repayment in relation to the loans with which these proceedings are concerned (see Findings of Fact 60-65 above). Reference may also be made to paragraphs 5(iii)(c), 39, and 41-46 of the Agreed Statement set out above. A note to the Chapman Accounts for the year 1993 states that the Lenders have an option for an indefinite period to convert the Loan ...into additional ....shares (see Findings of Fact 66-70 above). Reference may also be made to paragraphs 5(ii)(c), 25, 26, and 29-31 of the Agreed Statement. As there is no obligation to demand repayment within a reasonable time, it is difficult to see how or why one should imply an obligation to invoke the alternative right (and thus exercise the option) within such a period. It is therefore impossible to imply a term which is inconsistent with (a) such express provision evidencing the terms of agreements reached between the companies and the deceased and (b) the enumerated paragraphs of Agreed Statement on the basis of which this appeal proceeds. In my view, the term proposed is neither implied as a matter of fact nor law.
136. The unit of valuation, therefore, includes the right, at the deceased's option, to convert loans into ordinary shares, in effect a form of convertible loan stock. That right could not be defeated by the debtor tendering repayment. In the first place, on a proper construction of the contract conferring the right, the option cannot be defeated in that way. That would make no business sense. It would derogate from the grant of the option. Such a result should not readily be inferred. In the second place, the point is in any event foreclosed by paragraphs 30 (Chapman) and 49 (New Inverness) of the Agreed Statement which acknowledge that, if the borrower chose to tender repayment, the lender could nevertheless exercise the option to convert, and the borrowing company would be bound to issue ordinary shares in lieu of cash. I do not consider that the word validly used in these paragraphs detracts from that analysis. No question arose as to the method of exercising the option. Timing is not an issue because the agreement contained in these paragraphs of the Agreed Statement assumes that the order of events is first, tender of repayment, and second, exercise of the option to convert.

Prescription

137. The next question is, having identified the units of valuation, whether these units are worthless because whatever rights may once have existed, they had, by the date of the deceased's death, prescribed. The starting point is to identify what obligation or right may have become enforceable and when it became enforceable. It is an elementary principle that, in the absence of a contractual stipulation, a debtor is under no obligation to repay a loan unless a demand is made. As no demand was made there could be no enforceable obligation which could have prescribed (see Prescription & Limitation (Scotland) Act 193 section 6(1) and Schedule 2 paragraph 2(2)(b); and see for example Bank of Scotland v Laverock 1991 SC 117). It therefore seems reasonably clear that any plea of prescription on the part of the two companies to resist enforcement of the conversion rights would fail if that provision were applicable to the parties' contract.
138. The options were an alternative to repayment in cash. The debtor company's obligations could be discharged, at the option of the creditor, by repayment or by the issue of shares. The parties to these contracts have defined the mechanism by which the liability of the companies might be discharged. The documents evidencing the contracts do not specify any time within which such mechanism must be invoked. On the contrary, the documents indicate that there is no fixed period within which the option to convert must be exercised. It is a matter of agreement that no demand for repayment of the loans was made prior to the deceased's death. It is also a matter of agreement that the options had not been exercised before the deceased's death. In any event, there is no evidence from which it may be inferred that the mechanism by which the liability of the companies might be discharged had been invoked prior to the deceased's death. It is therefore difficult to see how the prescription clock could begin to run at any stage prior to the deceased's death. Put more formally, there were no enforceable obligations on which prescription could operate prior to the deceased's death.
139. In these circumstances, the right to convert arises from the contractually agreed options. Each option was inextricably linked with and part of the terms of the contract of loan or became part of the contract by subsequent variation of the mechanism by which the liability of the debtor company was to be discharged. The right (and correlative obligation) either falls within the general provisions section 6 and paragraph 1(g) of the 1973 Act; or forms part of a single obligation to repay a loan as to which parties have agreed a particular mechanism, in which case paragraph 2(2)(b) of Schedule 2 to the 1973 Act applies. I prefer the analysis that equiperates the right to demand shares (in exercise of the option) to repayment. I therefore consider that paragraph 2(2)(b) applies. As there was no written demand for repayment the right to convert had not prescribed as at the deceased's death.
140. Even if I am wrong about that, the nature of the arrangements entered into was such that the right to demand shares in lieu of cash did not arise unless and until the option was exercised. It is plain from the evidence contained in the companies' books and records that the agreement was that no limitation should be placed on the time by which the option might be exercised. Thus, until the option is exercised there is no enforceable obligation on which prescription can operate. The position may be different with more conventional options. Nevertheless, having regard to the particular nature of the arrangements under discussion, it would seem to me very odd if the right to convert had prescribed, but the right to demand repayment in cash had not. That is not a result which the 1973 Act requires me to reach.
141. If the foregoing were not enough to establish, with sufficient certainty, the existence of the loans and the related option rights, the fact that in 1995 the executors exercised such option rights relating to Chapman, and that that company and its directors recognised them (see paragraph 34 of the Agreed Statement), supports the foregoing conclusions. This is not using hindsight in any illegitimate sense. The question of the existence of the loans and options is one of fact and law. It is the use of hindsight as part of the valuation exercise that is illegitimate. That stage has not yet been reached. It is perfectly legitimate to use the subsequent transaction to identify the unit or one of the units of valuation which it is the task of the valuers (and ultimately this tribunal) to value.

The Advice of Counsel on Prescription

142. I agree with Mr Thomson that, in one sense, the Opinion of Counsel obtained on the question of prescription is irrelevant. Whether the rights to convert have prescribed is a question of law for this Tribunal and any court on appeal. However, I have found Mr Johnston's views helpful in formulating my decision on this issue. For the reasons already given, which largely coincide with his Opinion, I have concluded that the conversion rights had not prescribed by the date of the deceased's death.
143. Much was made of the fact that, in his carefully worded Opinion, Mr Johnston stated that The issue is a delicate one; and that at the consultation he is recorded as stating in response to a question from Mr Sutherland, as to whether judges might differ in their views on the question, that that was likely. However, it seems to me to be clear, reading the Consultation Note as a whole (and assuming it is an accurate record), that Mr Johnston maintained the views expressed in his written Opinion and concluded by stating that it was unlikely that a court would construe the rights attached to the loans in such a way as to allow each company to avoid the obligation to convert.
144. It also seems reasonably clear that the Appellants did not receive the Opinion they would have liked from Mr Johnston and sought a consultation to test matters further. Why Mr Sutherland attended the consultation is unclear. All he required was a statement of the law which he was to assume for the purposes of his valuation. He did not need to descend into the arena and discuss questions of law with counsel with a view perhaps to making him change his mind. An expert who does that loses a degree of independence which he might otherwise have. A court or tribunal will examine the evidence of such an expert with particular care.
145. Not surprisingly, the Appellants did not intimate the Opinion to HMRC at that stage. They did not, of course, have any obligation to do so. They did so later in January 2004 (see Finding-in-Fact 81).

Valuation Consequences

146. In these circumstances, the unit of valuation is the shares in each company plus the relevant conversion rights or options which must be regarded as valid, subsisting and enforceable. Both Mr Eamer and Mr Sutherland spoke to valuations on that basis and on the basis that the conversion rights/options were unenforceable. It is the former basis which is relevant. Neither expert spoke to a valuation which was some halfway house between these two positions. In particular, Mr Sutherland was of the view that if there were sufficient doubts, one valued as if no such conversion rights existed at all.
147. Here, the conversion rights (as they have been referred to by the parties) either can be defeated or have prescribed and have no value as they in effect do not exist, or they are valid subsisting and enforceable and should be given their full value. In my opinion, these conversion rights existed immediately prior to the deceased's death. They could not be defeated and they had not prescribed. They must therefore be given their full value in accordance with applicable valuation principles, law and practice. Having reached that view, there can be no room for discount for alleged uncertainties or difficulties the prospective purchaser might face. Here, there are none; each option is assumed to have been exercised; the shares issued and the purchaser, where appropriate, is assumed to control the company to a lesser or greater extent depending on the proportion of the shareholding assumed to have been acquired.
148. The discount of 5-10-% referred to by Mr Eamer in cross examination and heavily relied upon by Mr Simpson was a concession on the hypothesis that such difficulties existed. It is plain from Mr Eamer's evidence as a whole and from his Report that he was not acknowledging that his valuation fell to be reduced if I concluded that the conversion rights were valid subsisting and enforceable immediately prior to the deceased's death.
149. I find it difficult to assume some sort of half way house where the transaction proceeds at a discount because of the defects to use Mr Todd's word. His evidence, through no fault of his, largely misses the point. He would not have advised a client to proceed on the basis of the minimal documentation contained in the books and records of New Inverness and Chapman. That may be wise and cautious counsel. However, once an asset has been identified as forming part of a deceased's estate, it has to be valued at the price which it might reasonably be expected to fetch if sold in the open market. His principal concern was the risk of what he perceived to be the uncertainties, essentially the lack of formal documentation, the ability to defeat the option by foisting repayment on the creditor and the prescription issue (lines of argument which I have rejected).
150. Given the terms of the Agreed Statement (which I suspect Mr Todd was not aware of when writing his report or giving his evidence in chief) and the conclusions I have reached on the questions of law relating to the validity, subsistence and enforceability of the conversion rights, Mr Todd's views cannot be used to discount the value of the asset which I have identified and described. That would be valuing a different asset altogether. In particular, Mr Todd was of the view that the option could be defeated by repayment. I have held otherwise. Moreover, paragraphs 30 and 49 of the Agreed Statement of Facts compel me to do so. I note too, in passing, that in cross-examination Mr MacDonald stated that he would not be comfortable with the company denying the options.
151. On the evidence, and having regard to the relevant law, I find that there is no significant doubt that the loans and related conversion rights or options (a) were granted and (b) were valid, subsisting and enforceable

immediately prior to the deceased's death.

Meeting with HMRC on 23^rd August 2002 (Finding-in-Fact 78)

152. I heard evidence about this meeting from Mr Sutherland and Mr Macdonald. Notes prepared by Mr Twiddy were also produced, although he did not give evidence. In my view, this whole line of evidence was simply pointless. Nothing was decided or agreed. Nothing occurred which was binding on one side or another or barred either party from taking any point of fact or law at the subsequent appeal. No attempt was made to set up any such line of argument. The best way to describe the meeting is perhaps to say that it had all the appearance of a without prejudice meeting with the commendable purpose of settling the valuation dispute or at least narrowing the issues; it did not lead to any agreement except that all were agreed that there were many points to consider. It is unfortunate that the Appellants spent so much time on this topic, producing manuscript and typewritten notes of what allegedly transpired. Even accepting the Appellants' account in its entirety does not assist them at all.

Valuation Principles

153. I resist the temptation to review all the authorities cited in detail or to attempt to set forth an all embracing statement of guiding principles. I have no wish and would not presume to attempt add to the anthology of dicta of guiding principles to be applied to share valuation for the purposes of Inheritance Tax. Suffice it to say that that at the end of the day there was no real dispute between the parties that (i) the valuation date is immediately before the deceased's death (ii) the hypothetical buyer and seller are both willing participants in the hypothetical sale, (iii) the buyer acts prudently and reasonably, and seeks and obtains all relevant information to enable him to make an informed offer; he will be diligent in his enquiries; the seller is assumed to respond to all reasonable enquiries with such reasonable responses as might reasonably have been made, (iv) the prudent prospective purchaser acts with reasonable foresight but without the benefit of hindsight, (v) the sum deemed to have been offered and accepted is the sum the shares could reasonably be expected to fetch in the open market (vi) the shares and conversion rights are all sold together as a package, (vii) the sale is assumed to take place in the real world i.e. the only assumptions to be made are the statutory ones or those derived from case law, and (viii) the sale is assumed to be carried into effect, i.e. the shareholding bought is assumed to be registered in the name of the notional purchaser notwithstanding any obstacles in the Articles of Association.

Valuation Evidence

154. Both experts, Mr Sutherland and Mr Eamer, are distinguished and experienced. Mr Sutherland has been a Fellow of the Chartered Institute of Accountants in England and Wales for over fifty years. He gave his evidence with an elegance and courtesy rarely to be found these days in the courts and tribunals. He is a past Chairman of the Society of Share and Business Valuers He has inter alia been appointed Honorary President of that Society. He is also a past Chairman of the Society of the Fiscal Valuation Share Forum. He has written on the subject of share valuation for fiscal purposes. Mr Eamer is a director in the Share and Business Valuation Department of BDO Stoy Hayward LLP, Chartered Accountants. He is a founding member and former Council Member of the Society of Share and Business Valuers. He is also a founding member of the Expert Witness Institute and co-author of Eastway, Booth and Eamer, Practical Share Valuation 4^th Edition (1998).
155. The parties agree that the shareholdings should be valued on an assets basis (Agreed Statement paragraphs 10, 19, and 54 of the Agreed Statement).

appellants' evidence

156. Mr Sutherland's oral evidence supplemented his detailed Report dated 7/4/08.
157. Mr Sutherland's valuation of the shares and Loans to the companies as they existed immediately before the deceased's death (i.e. assuming the conversion rights either do not exist or have no value) is as follows (taken from his written Report):-

Cape Wrath

	Net Assets as agreed		£542,266	£542,266
	Value of 1,052 £1 Ordinary shares of New Inverness		£56,767	£56,767
	Total		£599,033	£599,033
	Number of shares in issue		2,000	2,000
	Deceased's holding	670
	Percentage of total	26.8%
	Asset value of holding		£160,525	£160,525
	Minority discount	60%		£96,315
	Value of Holding		£64,210	£64,210

Chapman

	Net Assets as agreed		£744,944	£744,944
	Value of 400 £1 Ordinary shares of New Inverness		£16,219	£16,219
			£761,163	£761,163
	Less: Preference shares		3,700	3,700
	Total		£757,463	£757,463
	Number of shares in issue		8,000	8,000
	Deceased's holding	2,375
	Percentage of total	29.7%
	Asset value of holding		£224,865	£224,865
	Minority discount	60%		£134,919
	Value of Holding		£89,946	£89,946
	Loans		£4,900	£4,900

New Inverness

	Net Assets as agreed		£476,063	£476,063
	Less: Preference shares		3,000	3,000
			______	______
	Total		£473,063	£473,063
	Number of shares in issue		3,500	3,500
	Deceased's holding	991
	Percentage of total	28.3%
	Asset value of holding		£133,944	£133,944
	Minority discount	60%		£80,366
	Value of Holding		£53,578	£53,578

	Cape Wrath Holding	1,050
	Percentage of total	30%
	Asset value of holding		£141,918	£141,918
	Minority discount	60%		£85,151
			£56,767	£56,767

	Chapman Holding	400
	Percentage of total	11.4%
	Asset value of holding		£54,064	£54,064
	Minority discount	70%		£37,845
			£16,219	£16,219
	Loans		£8,000	£8,000

158. It can be seen from the foregoing table that for the minority holdings in Cape Wrath (26.8%), Chapman (29.7%) and New Inverness (28.3%) Mr Sutherland has made a discount of 60%; he uses the same 60% discount for the minority shareholding interest (30%) of Cape Wrath in New Inverness. In respect of the minority shareholding interest of Chapman in New Inverness (11.4%) he makes a discount of 70%.
159. Mr Sutherland's valuation of the shareholdings on the assumption that the conversion rights were valid subsisting and enforceable is as follows (taken from his written Report):-

Cape Wrath

	Net Assets as agreed		£542,266	£542,266
	Value of 1,052 £1 Ordinary shares of New Inverness		£11,809	£11,809
			______	______
	Total		£554,075	£554,075
	Number of shares in issue		2,500	2,500
	Deceased's holding	670
	Percentage of total	26.8%
	Asset value of holding		£148,481	£148,481
	Minority discount	60%		£89,088
	Value of Holding		£59,393	£59,393

Chapman

	Net Assets as agreed		£744,944
	Value of 400 £1 Ordinary shares of New Inverness		£11,997

			£756,941	£756,941
	Less: Preference shares		3,700	3,700
			£753,241	£753,241
	Add: Loans converted		3,500	3,500
			_______	_______
			£756,741	£756,741
	Number of shares in issue		11,500	11,500
	Deceased's holding	5,875
	Percentage of total	51.1%
	Asset value of holding		£386,596	£386,596
	Discount	20%		£77,319
	Value of Holding		£309,277	£309,277

New Inverness

	Net Assets as agreed		£476,063	£476,063
	Less: Preference shares		3,000	3,000
			£473,063	£473,063
	Add Loans		9,370	9,370
	Total		£482,433	£482,433
	Number of shares in issue		12,870	12,870
	Deceased's holding	8,991
	Percentage of total	69.9%
	Asset value of holding		£337,073	£337,073
	Discount	20%		£67,415
			£269,658	£269,658

	Cape Wrath Holding	1,050
	Percentage of total	8.2%
	Asset value of holding		£39,364	£39,364
	Discount	70%		£27,555
	Value of Holding		£11,809	£11,809

	Chapman Holding	400
	Percentage of total	3.1%
	Asset value of holding		£14,996	£14,996
	Discount	20%		£2,999
	Value of Holding		£11,997	£11,997

160. It can be seen from the foregoing table that on the foregoing assumption (loans are converted into shares) the deceased's shareholding in Cape Wrath is still a minority holding (26.8%) and so a discount of 60% is applied. The deceased's shareholding in Chapman becomes a majority interest (51.1%) and so a discount of only 20% is applied. The deceased's shareholding in New Inverness also becomes a majority interest (69.9%) so a discount of 20% is applied. The discount applied to Chapman's holding of shares in New Inverness is 20% because the deceased (on the assumption made) held the majority shareholding interest in both Chapman and New Inverness. A 70% discount is applied to the Cape Wrath holding in New Inverness (8.2%).
161. In summary Mr Sutherlands' valuations are:-

Value of the deceased's holdings as they existed at the relevant date (i.e. no conversion rights) –

£

	Cape Wrath		670 shares	64,210
	Chapman		2,375 shares	89,946
			Loans	4,900
	New Inverness		991 shares	53,578
			Loans	8,000
	Total			£220,634

Value of the deceased's holdings if the conversion rights could be exercised:-

£

	Cape Wrath		690 shares	59,393
	Chapman		5,875 shares	309,277
			Loans	1,400
	New Inverness		8,991shares	269,658
	Total			£639,728

The difference between Mr Sutherland's two totals is £419,094

162. It was Mr Sutherland's opinion that no prudent purchaser would pay anything for the conversion rights attaching to the Loans. His reasons for that view were, in summary (i) lack of documentary evidence of the loans and conversion rights, (ii) a prudent purchaser would have sought legal advice about the conversion rights, (iii) the companies were MacArthur family money boxes having no special attributes, (iv) the conversion rights could be extinguished by repayment at any time, and this could be expected to be carried out to defeat the conversion rights, (v) the other shareholders and directors could be expected to resist the exercise of the conversion rights, (vi) the prospective purchaser would have to resort to litigation which would deplete the companies' funds, particularly if there were appeals, and (vii) there was a risk that the conversion rights had prescribed.
163. Mr Sutherland's valuations proceed on the basis that (a) the conversion rights are converted and the converted shares are valued in combination with the existing shareholdings; or (b) the conversion rights have no value at all. He did not advance any intermediate valuation to reflect the fact that the asset was (on one hypothesis) the right to convert; he assumed that this was the same as the value of conversion rights once converted into shares. Mr Eamer followed the same all or nothing approach. He pointed out in cross-examination that the assets are being valued on the basis that the rights would be converted into shares; this, Mr Eamer said, was not strictly correct but that it made no difference to value the rights as if exercised and converted into shares. There is no evidence to enable me to adopt a different approach.

hmrc evidence

164. Mr Eamer's oral evidence supplemented his detailed report. His valuation of the shares and Loans to the companies as they existed immediately before the deceased's death (i.e. assuming the conversion rights either do not exist or have no value) is as follows (taken from his written Report):-
165. Summary of Values on the Basis that the Law of Prescription Applies
New Inverness

991 shares out of 3,500 =	28.3%
28.3% of net assets of £473,063 =	£133,876
Less 45% discount	(£60,244)
Value	£73,632

Chapman

2,375 out of 8,000 =	29.68%
Net assets excluding interest in NILC	£741,244
Shareholding in NILC*	£18,925
	£760,169
29.68% of £760,169	£225,618
Less 45% discount	(£101,528)
Value	£124,090
* 11.43% of £473,063 =	£54,071
Less 65% discount	(£35,146)
	£18,925

Cape Wrath

670 shares out of 2,500 =	26.8%
Net assets excluding shareholding in NILC	£542,226
Shareholding in NILC*	£78,056
	£620,282
26.8% of £620,282	£166,235
Less 45% discount	(£74,805)
Value	£91,430
* 30% of £473,063 =	£141,919
Less 45% discount	(£63,863)
	£78,056

74. Mr Eamer's valuation of the shareholdings on the assumption that the conversion rights were valid subsisting and enforceable is as follows (taken from his written Report):-

75. Summary of Values

New Inverness

8,991 shares out of 12,870 =	69.8%
69.8% of net assets of £482,433 =	£336,738
Less 12.5% discount	(£42,092)
Value	£294,646

Chapman

5,875 shares out of 11,500 =	51.08%
Net assets excluding shareholding in NILC	£744,744
Shareholding in NILC*	£13,128
	£757,872
51.08% of £757,872	£387,121
Less 12.5% discount	(£48,390)
Value	£338,731
* 3.11% of £482,433 =	£15,003
Less 12.5% discount	(£1,875)
	£13,128

Cape Wrath

670 shares at 2,500 =	26.8%
Net assets excluding shareholding in NILC	£542,226
Shareholding in NILC*	£13,779
	£556,005
26.8% of £556,005	£149,009
Less 45% discount	(£67,054)
Value	£81,955
* 8.16% of £482,433 =	£39,366
Less 65% discount	(£25,587)
	£13,779

76. Mr Eamer's approach in relation to discount for lack of marketability, majority and minority shareholdings in unquoted companies was to review the evidence in such case law as existed. He noted that shares in quoted investment companies typically traded at discounts of between 10% and 20% from net asset backing. The discount was a little higher for quoted property investment companies and was usually around 30%.

77. For lack of marketability, he made a deduction of 50% and supported this by reference to the current edition of Dymond's Capital Taxes paragraph 23.374, (20% or so), Caton v Couch 1995 STC (SCD) 34 ...60-70% for a holding under 25% in a trading company).

78. As for majority shareholdings in unquoted property investment companies, he referred to Goldstein v Levy Gee 2003 EWHC 1574 (Ch), to illustrate to support the view that 12.5% was a reasonable deduction to make. He noted that both the shareholdings in New Inverness and Chapman (on the assumption that the options are enforceable) would be less than 75%. A special resolution could therefore not be passed without co-operation from other shareholders. In cross-examination he stated that the 12.5.% deduction was for both lack of marketability and the inability to secure the passing of a special resolution.

79. In relation to minority shareholding over 25%, he added back 50% as a nuisance factor and referred to the decision at first in instance in Re Lynall (28% shareholding in a trading company). In relation to Cape Wrath he acknowledged that as a minority holding tax disadvantages might have to be taken into account. He had not taken such disadvantages into account. An appropriate figure would be up to 5%

80. In relation to Cape Wrath's holding in New Inverness (on the assumption that the options were enforceable) he adopted the 25% deduction for lack of marketability but without the addition of the nuisance factor. He adopted a similar approach in relation to Chapman's Shareholding (on the same assumption) in New Inverness but as on this basis the shareholding of Chapman is 51% the deduction made is 12.5%.

81. Mr Eamer acknowledged that if there were a doubt about prescription, a further discount would have to be made which might vary between 5% and 45% depending on the strength of the doubt. Likewise if there were a real doubt about the documentation of the loans and options, he thought that an overall deduction of 5-10% might be made.

analysis of expert evidence

82. Although there is agreement on the net asset value of each company, there are a number of minor discrepancies in the figures in the expert reports and the calculation of the percentage of the various holdings. Neither counsel referred to or made anything of these discrepancies, and I have ignored them as being, in effect, de minimis.

83. Both Mr Sutherland and Mr Eamer included in their Reports a selection of dicta from cases over the years on valuation principles. Mr Sutherland's selection included cases which emphasised that a purchaser would be an unwelcome or detested intruder in a family company (for example In re Samuel Thornley (decd) 1928 7 ATC 180, Salvesen v IRC 1930 9 ATC 43 at 54 per Lord Fleming. Mr Eamer also mentioned Thornley. However, it seems to me these dicta coloured Mr Sutherland's approach to the valuations and led to him make greater discounts than he might otherwise have done. These dicta are however irrelevant for the purposes of those valuations except perhaps in relation to the modification of discount where the detested intruder holds a shareholding of between 25% and 49%. Having regard to the terms of the Agreed Statement, it is of no moment that the purchaser is an intruder (detested or otherwise) because (a) he secures a majority shareholding in two of these companies. The fact that other family members become minority shareholders is of no importance because the purchaser controls the company and its board. It might well have been relevant if these companies were family trading companies where family members had key roles in the management of company business including its staff, and whose knowledge of its customer base was important or their personal reputation was significant, and formed part of the goodwill of the company. However, none of these factors is present. Mr Sutherland repeatedly emphasised that all three companies were essentially investment companies or family moneyboxes.

85. Mr Sutherland did not favour Mr Eamer's method of deducting for unmarketability and adding back for the nuisance factor. His view was that one simply could not compare quoted and unquoted companies. Moreover he considered there to be little difference between the value of a shareholding which was just over 25% and one which was just under. This was because family companies were not unduly concerned with the legal niceties of company law. He preferred to rely on experience and feel.

86. The difference between the two expert valuations on the assumption that the conversion rights or options were valid subsisting and enforceable at date of death may be summarised as follows:-

Company	Sutherland	Eamer	Difference	Notice of Determination
New Inverness	£269,658	£294,646	£24,988	£294,939
Chapman	£309,277 Loans £1400	£338,731	£29,454	£338,768
Cape Wrath	£59,393	£81,955	£22,562	£81,954
Total	£639,728	£715,332	£75,604	£715,661

87. The difference between Mr Sutherland's valuation and the Notice of Determination is £75,933. The difference between Mr Eamer's valuation and the Notice of Determination is de minimis. The most significant difference between the parties lies in the parties' views of the status of the options or conversion rights. Once that issue is resolved, the difference between the valuers on the valuation exercise is in the order of 10-12%; thus if Mr Eamer's valuation is reduced by about 10% one reaches a figure very close to Mr Sutherland's valuation. If one adds 12% to Mr Sutherland's valuation one reaches a figure very close to Mr Eamer's valuation. Valuation, being an art, rather than a science, in which mathematical certainty cannot be achieved, the difference between the two experts is perhaps what one might expect. Clearly, there can be no "correct" value; there is always room for difference of opinion. There is an element of discretion based on experience and the application of guiding principles (rather than inflexible rules) to the particular facts relating to the unit of valuation.

166. Nevertheless, the Appellants contend (albeit in the alternative and as a fall- back position, which position they have now reached) for a figure some £75,000 less than the Notice of Determination. I must therefore consider whether the sums specified in the Notice of Determination should be confirmed or varied.

Discount for Majority Holdings (Chapman -51.1%; New Inverness-69.9%)

89. I have already concluded that the correct basis for valuation is on the assumption that the conversion rights subsisted and were valid and enforceable. The competing valuations are therefore those found in paragraphs 67 and 75 above. I now consider the different discounts applied by Mr Sutherland and Mr Eamer.

90. Mr Sutherland applies 20% and Mr Eamer applies 12.5%. Mr Sutherland justifies his figure by reference to the following factors (i) the companies were family moneyboxes, (ii) inadequate documentation of the loans and conversion rights, (iii) the conversion rights could be defeated, (iv) the directors and shareholders would resist the conversion which would lead to expensive litigation (v) the other shareholders would make life difficult for the purchaser; (vi) any attempt to pay himself or a director appointed by the purchaser anything more than a modest salary would amount to unfairly prejudicial conduct. These factors include some of the factors Mr Sutherland deploys to argue that the conversion rights have no value at all.

167. In cross examination, he, in effect, conceded that factor (i) carried no weight, and that (ii) and (iii) were irrelevant. I have difficulty in seeing the relevance of factors (iii) and (iv) where one starts from the basis that the conversion rights are enforceable. Factor (v) can have little impact for a majority shareholder who controls or has the ability to control the company's board of directors. As for the last factor, I consider that one has to presume that in all cases the reasonably prudent prospective purchaser will be aware of his rights and obligations as majority shareholder and will bid on the basis that he will in due course, as majority shareholder, act lawfully at all times. Factor (vi) must therefore apply in all cases and is of no special significance for present purposes.
168. Mr Eamer's figure is 12.5%. This is based on observations in Goldstein v Levy 2003 EWHC 1574 (Ch). That case concerned the alleged negligent valuation of shares in a property investment company by its auditors; the articles of association required that valuation be carried out without discount for minority holdings. The auditors' valuation was based on the net asset value of the company. It made a discount of 10% on the basis that this was what would be paid for the assets as a single portfolio; a further deduction was made for contingent tax liability on deemed disposal. 12.5% was deducted for lack of marketability; the allegation was that inter alia 12.5% was inappropriate.
169. The judge held after hearing expert evidence, that although some aspects of the valuation were negligent, a competent accountant would have deducted between 0% and 12.5% for lack of marketability and identified 6.25% as the correct figure. Overall the valuation was within the permissible margin of error and the claim failed. Although the judgment contains an illuminating analysis of the approach to negligent valuation cases, there is little discussion of the deduction for lack of marketability (see paragraphs 119-124). However, it does provide some support for Mr Eamer's figure. The deduction of 12.5% as opposed to 6.25% favours the Appellants.

94. Chapman has a 3.1% holding in New Inverness. Mr Sutherland applies a discount of 20%. Mr Eamer applies a discount of 12.5%. They both at least adopt the same approach to this holding.

170. Both experts rely on their considerable experience. However, my impression of Mr Sutherland's evidence was that, but for the factors he considered to be relevant he would have accepted Mr Eamer's figure. As I consider the factors advanced by Mr Sutherland to be either irrelevant or carry little weight I am driven towards accepting Mr Eamer's figure of 12.5%. I see no point in me adopting a figure somewhere in between 12.5% and 20%. I would simply be hazarding a guess. I decline to do that. That would be guesswork but not intelligent guess work. Accordingly, I adopt Mr Eamer's figure of 12.5%.

Discount for Minority Holdings

96. I have already concluded that the correct basis for valuation is on the assumption that the conversion rights subsisted and were valid and enforceable. I now consider the different discounts applied by Mr Sutherland and Mr Eamer.

97. In relation to Cape Wrath, where the minority shareholding is agreed to be 26.8%. Mr Sutherland applies 60%. Mr Eamer applies 45%. Mr Sutherland justifies his view that the general levels of discount applied by Mr Eamer are inadequate by reference to the following factors (i) the dividend policy had remained unchanged for many years, (ii) the moneybox factor referred to above, and (iii) there was no prospect of sale or winding up in the foreseeable future. In cross examination, Mr Sutherland said that 45% was a standard figure. There was little difference, he said between a shareholding just over and just under 25%.

171. Mr Eamer's approach was to consider the valuation of minority shareholdings (above and below 25%) in unquoted companies in a variety of reported cases. He starts by deducting 25% for the fact that shares in quoted investment companies and property investment companies trade at discounts of between about 10-30% of their net asset value (property investment companies being at the higher end of discount). From the resulting 75% he deducts 50% thereof for lack of marketability. From the resulting 37.5% he adds back 50% for what he describes as a nuisance factor because the shareholding exceeds (just) the 25% threshold. This produces a figure of 56.25% which he rounds down to 55%. This produces the discount of 45%. Lynall was said to be the basis for the nuisance factor. The result is the same as Mr Sutherland's standard figure.

99. On the valuation basis under discussion, Cape Wrath has an 8.16% shareholding in New Inverness. Mr Sutherland applies a discount of 70%. Mr Eamer applies 65%.

100. Mr Sutherland's view was that for such a powerless small minority holding in the light of the other factors summarised at paragraph 97 the minimum discount is 70%. Mr Eamer's approach was as set forth in paragraph 98 except that he made no addition for the nuisance factor as the shareholding was less than 25%. This leads to a figure of 37.5% which he rounds down to 35%. This produces a resulting discount of 65%.

172. Although there is little difference between the experts here, I find Mr Eamer's approach to be preferable and accept it. It is based on such case law as exists and seems to me to be a fair and logical assessment. The factors advanced by Mr Sutherland do not seem to be of sufficient weight to reduce further the general levels of discount advanced by Mr Eamer. But for these factors my impression is again that Mr Sutherland would not have quarrelled with Mr Eamer's figures. A small minority shareholder can never control dividend policy. The fact that the companies are moneyboxes does not it seems to me make them less attractive for a minority shareholder or a majority shareholder and therefore seems to me to be irrelevant to the question of discount. Likewise, I struggle to see the particular relevance here (as opposed to generally) of the prospect of sale or liquidation to the question of discount for a minority shareholding. Finally, it seems to me that a shareholding which is just over 25% may well have more value than a shareholding which is just under 25%. Although the business of private companies is not run by the passing of special resolutions, the power to block such a resolution may be a valuable weapon in a minority shareholder's armoury, particularly where, as here, assumed hostility between the hypothetical incoming and the existing shareholders has been emphasised. While the add back of 50% advanced by Mr Eamer may be at the high end of the scale, I am unable to conclude that it is outwith the range of figures which might properly be selected. At the end of the day the two valuations are, overall, similar and in relation to Cape Wrath, the minority shareholding, very similar (Eamer £81,955; Sutherland £59,393). If each is adjusted by 15% the difference is less than £1,500.
173. In these circumstances, while I readily acknowledge the experience and expertise of Mr Sutherland, I have decided, for the reasons I have attempted to explain, to adopt the valuation approach advanced by Mr Eamer. I should mention two other matters which were raised.

Costs of Litigation

174. In his closing submissions, Mr Simpson referred to the uncertainties of the Options and suggested that the costs of litigation to establish the Option rights should be taken into account. He suggested a figure of £60,000. Even if this is a factor to be taken into account, I am unable to accept the figure of £60,000. It was not spoken to by any witness. The reference in the Note of the Consultation held with Mr Johnston Q.C. on 12/5/03 refers to the sum of £30,000. I heard no reliable evidence as to what the costs of litigating to establish or refute the existence and enforceability of the Options might be, far less the basis upon which such figure proceeds, e.g. the type of action, the nature and possible duration of any hearing, whether both senior and junior counsel would be instructed or only one. I would have been unwilling to make a stab in the dark. Accordingly, even if this were a relevant argument (which it is not) I could not give effect to it.

Tax Benefits of Quoted Investment Trusts

175. In the course of the cross examination of Mr Eamer, he accepted that the companies under consideration might not enjoy the same tax benefits as quoted investment trusts. He acknowledged that a further discount of perhaps up to 5% might be appropriate in relation to minority holdings. How that was to be applied to either his valuation exercise or that of Mr Sutherland was not explored in evidence. Mr Sutherland made no reference to this matter in his Report as a basis for further discounting the value of any of the shareholdings. Nor did he mention it in the course of his oral evidence. Just what those tax benefits were or might have been and how precisely they would have affected the worth of the company or the valuation of shareholdings was also not explored. Counsel did not attempt to carry out the arithmetic. Mr Simpson, in his closing submissions, supported (in the alternative) the figures advanced by Mr Sutherland which I have summarised in the Table at paragraph 67 above.
176. In these circumstances, I find that the possible further discount of 5% is too uncertain to enable any effect to be given to it and I decline to do so.

Statement of Issues

177. In spite of the length and detail of the Statement of Issues for Determination, neither counsel, as I have already noted, structured their carefully prepared submissions around it. Both simply gave very brief formal answers to the eleven questions posed which added nothing to the substance of their arguments. In these circumstances, there is no point in adding to the length of this decision by providing formal answers to the eleven questions set forth in the Statement of Issues. My task is to determine the appeal. I have covered the issues raised in the body of this Decision. The first three questions and questions 6 and 7 relate to the nature and scope of the conversion rights or options. Questions 4 and 5 relate to prescription, which I have already discussed. Questions 8, 9, 10 and 11 relate to factors affecting the valuation exercise which I have considered at length. Some are superseded by the Agreed Statement of Facts not in Dispute.

Result and Disposal

107. On the evidence, and having regard to the relevant law, I find that there is no significant doubt that the loans and related conversion rights or options (a) were granted and (b) were valid, subsisting and enforceable immediately prior to the deceased's death.

108. In particular, the conversion rights or options had not prescribed by the date of the deceased's death.

109. The appropriate basis for valuation of the shareholdings identified in the Notice of Determination is on the assumption that the conversion rights or options subsisted and were valid and enforceable, and that the conversion rights or options had been exercised and converted into shares.

110. Each Notice of Determination sets forth the price which the property therein specified might reasonably be expected to fetch if sold in the open market immediately before the deceased's death.

111. As I am not satisfied that the determination in each Notice ought to be varied or quashed, I confirm the determination appealed against. The appeals against the Notices of Determination are therefore refused.

J GORDON REID QC, F.C.I.Arb. SPECIAL COMMISSIONER RELEASED: 9 July 2008

SC 3148/2007