What is tax amortisation benefit (TAB) and how does it affect valuation?

Full Explanation

When an intangible asset is acquired and recognised on the balance sheet, it is amortised (or depreciated) over its useful life, creating tax deductions that reduce taxable income and cash tax burden. TAB is the present value of these tax deductions. For example, if a £1M intangible asset is amortised over 10 years, annual amortisation is £100K. At a 25% tax rate, this creates £25K annual tax savings. Discounted over 10 years at 10%, the present value of tax savings (TAB) is approximately £154K. TAB applies only to acquired intangibles (through M&A) that meet tax amortisation requirements. Section 197 intangibles under US tax law (like customer relationships, non-compete agreements, and some purchased goodwill) are amortisable over 15 years. In the UK the rules are narrower: in an asset purchase most acquired intangibles are relieved in line with the accounts, but goodwill and customer-related intangibles get relief only when bought with qualifying IP (6.5% a year since 1 April 2019). TAB is especially valuable in an asset purchase, where the buyer takes a new tax basis in the intangible assets and gets deductions the seller did not have, which reduces the effective cost of the acquisition. In a share purchase the buyer gets no such deduction, but a fair value still includes a TAB, because fair value assumes a market participant buying the asset itself; that is a measurement convention, not relief the actual buyer receives. VCs and acquirers factor TAB into purchase price allocations.

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