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. UK treatment varies but generally aligns. TAB is especially valuable for acquisitions because the buyer can increase the basis of intangible assets, creating tax deductions not available to the seller. From a valuation perspective, TAB reduces the effective cost of the acquisition and increases value to the buyer, sometimes making otherwise uneconomic acquisitions attractive. VCs and acquirers factor TAB into purchase price allocations.

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