Actual Market Value vs Unrestricted Market Value

AMV and UMV are crucial values that must be included in a valuation agreed upon by HMRC (HM Revenue and Customs).

Before issuing company shares to your employees, it’s important to look at two values: Actual Market Value (AMV) and Unrestricted Market Value (UMV). AMV and UMV are crucial values that must be included in a valuation agreed upon by HMRC (HM Revenue and Customs). You will often see these values when talking about EMI options schemes, especially in a valuation.

Actual Market Values (AMV) vs Unrestricted Market Value (UMV)

Before issuing the shares in the company, these two values must be calculated properly and it is extremely important that you understand how the two differ. The major difference between these values is that Unrestricted Market Value (UMV) is the market value of shares under the assumption that there are no restrictions. Actual Market Value (AMV) may be a significantly lower value than UMV.

What is Actual Market Value (AMV)?

Actual Market Value (AMV) is the value of the shares after they have been restricted. The restrictions are categorized into three categories: risk of forfeiture, restriction on ability to retain or dispose of securities, and the possible disadvantage in respect of the securities.

Restrictions are outlined in the Company’s Articles of Association, as well as other agreements such as subscription agreements and employee share plan guidelines. Most private company shares aren’t totally freely transferable, which means they can’t be sold. These limitations reduce their marketability and, as a result, market value.

The Actual Market Value (AMV) of shares refers to their value after being restricted. These restrictions fall under three categories:

  • The risk of forfeiture
  • Restrictions on the ability to retain or dispose of securities
  • The possibility of disadvantage concerning the guards

Importance of AMV for your company

The actual market value of a firm is determined by the entire market value of its outstanding shares, or market capitalization. Because market value includes profitability, intangibles, and future growth prospects, it tends to be higher than book value. One of the key reasons market value is important is that it gives an accurate way for establishing what an asset is worth that eliminates ambiguity or confusion. Customers and sellers in the marketplace frequently hold opposing views about a product’s worth.

Limitations of AMV

To determine a share’s market value, historical data must be available to compare the market value of one share to that of another. A company’s value is useless without a comparable figure to determine whether market players should be interested in the shares. Because share prices are driven by supply and demand, market value can be a very objective assessment. This means that an asset’s market value reflects simply what someone is willing to pay for it, not its fundamental value.

Factors that affect Actual Market Value

Getting the actual market value can be affected by several factors: earnings per share, book value per share, and price-to-earnings ratio. Here’s how each of these factors affect the AMV:

  • Earning per Share (EPS) – A firm’s profit is divided by the number of outstanding shares of its common stock to compute earnings per share. The resulting figure is used to determine a company’s profitability. It is typical for a corporation to declare (EPS) that has been adjusted for unusual items and potential share dilution. The higher a company’s (EPS), the more profitable it is thought to be.
  • Book Value per Share – The value of a business according to its books or accounts, as represented on its financial statements, is known as book value. It is, in theory, what investors would receive if they sold all of the company’s assets and paid off all of its debts and liabilities. As a result, book value is nearly comparable to the amount that stockholders would receive if the company were to be liquidated.
  • Price-to-Earnings Ratio – The price-to-earnings ratio (P/E ratio), price multiple or the earnings multiple, is a valuation ratio that compares a company’s current share price to its earnings per share. Investors and analysts use P/E ratios to estimate the relative value of a company’s shares. It can also be used to compare a company’s past performance to its own and aggregate markets to one another or over time.

Example of AMV

The actual market price is likewise typically used to consult the marketplace capitalization of a publicly-traded company. It is calculated by multiplying the variety of its great stocks with the aid of using the modern percentage rate. This is the rate that could be agreed upon between an inclined client and an inclined seller.

What is Unrestricted Market Value (UMV)?

According to the HMRC, unrestricted market value (UMV) is the value of shares immediately after a chargeble event under the assumption that there are no restrictions. In other words, the shares could be bought and sold easily at the prevailing worth of a company at the time.

Importance of UMV for your company

Unrestricted market value holds a lot of benefits, and thus, they are also relevant while issuing the shares. Employees being issued shares or options, options being exercised, or options lapsing are all reported on these forms, and you may need to record if an s.431 election has been made. When you make this choice, the restrictions on the shares are ignored, and the shares are treated as if they were purchased at the UMV. The employee must make the election within 14 days after receiving the shares.

Example of UMV

There is a company in which executives purchase small blocks of shares in their employer business for £1 per share. HMRC confirms that their UMV does not surpass a certain threshold. The valuation process includes a 66.67% discount. A portion of the company’s worth at the time of purchase of their eviction.

One of these executives becomes incapacitated and leaves a year later. The company’s worth has increased by 10% from £3 per share to £4 per share in that time. The executive duly increased the share price to £3.30 per share returned his shares to the corporation for a profit of £3.30 per share is the current market price.

HMRC, therefore, assesses the market value of the shares at the time of his disposal at £0.99 per share by applying a 70% discount to company value (MV attracts a higher discount than UMV because the directors may refuse to register the transfer of shares). Income tax is due on the £2.31 per share portion of his proceeds that exceeds the capital gain tax market value.

Individuals must pay income tax on their share awards, which are calculated using their unrestricted market value. The company’s valuation has been set at £1 per share, and the UMV of the shares has been agreed to be £0.70 with HMRC.

Key differences between AMV and UMV

When issuing shares in your company, you’ll need to keep two metrics in mind: unrestricted and actual market value. Understanding these two terms is critical if you’re considering giving your employees stock in your company. Here is a table to illustrate the key differences between both of them:

Point of DifferenceActual Market ValueUnrestricted Market Value
DefinitionAMV is used to set the income tax point for shares when exercised.This values all the shares as if there are no restrictions and could easily be bought.
Relevant forIt takes account of any such restrictions AMU.It ignores the negative impact on the value of certain restrictions on shares.
Money’s Worth It has less value for money.It has more value for money.
CommentSome companies mistakenly use AMV to calculate whether their EMI grants fall.UMV helps in granting the exercise price in excess.

Empower Your Business with Eqvista’s HMRC Valuation

Understanding the distinction between AMV and UMV when calculating the tax on employment-related securities is critical, particularly in EMI options. By considering the restrictions and conditions attached, AMV ensures that the correct tax is paid when the shares are exercised. In contrast, UMV limits the number of options granted to an individual or company.

Eqvista provides expert guidance and assistance to ensure your HMRC valuations are accurate, compliant, and legally sound. Our specialist team helps businesses navigate through the complexities of HMRC valuation, with over 14,000 satisfied customers trusting us for reliable and compliant valuations.

Eqvista helps in the most effective valuation if you are a business owner looking for one. We are here to help. Contact us by completing a sign-up form and getting a free consultation today.

Interested in issuing & managing shares?

If you want to start issuing and managing shares, Try out our Eqvista App, it is free and all online!