What is the Tax Amortisation Benefit and how is it calculated?

Full Explanation

When an intangible asset can be amortised for tax purposes, the resulting tax deductions create real cash flow savings that increase the asset's fair value. The TAB is calculated as an adjustment factor applied to the pre-TAB value. The formula is: TAB Factor = 1 / (1 - (Tax Rate × Present Value Annuity Factor / (1 + WACC)^n × n)), though in practice most valuers use the simplified Greenfield formula: TAB Factor = 1 / (1 - Tax Rate × PVAF), where PVAF is the present value of an annuity of £1 per year over the tax amortisation period, discounted at the asset-specific rate. For example, with a 25% tax rate, 15-year straight-line tax amortisation, and a 12% discount rate, the TAB factor would be approximately 1.13 — meaning the asset is worth 13% more than its pre-TAB value due to tax savings. Not all intangible assets qualify for tax amortisation in all jurisdictions. In the UK, goodwill from pre-2002 acquisitions and certain IP assets qualify; in the US, Section 197 allows 15-year amortisation for most acquired intangibles. The TAB should only be included when the specific asset in the specific jurisdiction qualifies for tax deductions. Excluding TAB when it applies understates the asset; including it when the asset is not tax-deductible overstates it.

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