What is the tax amortisation benefit in intangible asset valuation?

Full Explanation

The tax amortisation benefit (TAB) is an important but often overlooked component of intangible asset valuation. When an intangible asset is acquired in a taxable transaction and can be amortised for tax purposes, the buyer receives tax deductions over the asset's tax amortisation period. These tax savings have real economic value and should be reflected in the fair value of the asset. The TAB is calculated as: Fair Value (pre-TAB) multiplied by the TAB factor. The TAB factor depends on the tax rate, the tax amortisation period, and the discount rate. For example, with a 25% tax rate, 15-year tax amortisation period, and 12% discount rate, the TAB factor might be approximately 12-15%. This means an intangible asset with a pre-TAB value of £10 million would have a post-TAB value of approximately £11.2-11.5 million. The TAB applies when the transaction is structured as an asset purchase (or deemed asset purchase) where the buyer obtains a stepped-up tax basis in the acquired assets. In a stock purchase without a Section 338(h)(10) election (US) or equivalent, the buyer generally does not obtain tax amortisation benefits on the acquired intangibles, and no TAB adjustment is made. The inclusion of TAB in intangible asset valuation is required by both IFRS 13 and ASC 820 when determining fair value from a market participant perspective. The logic is that a hypothetical buyer would pay more for an asset that provides tax deductions than one that does not. In practice, the TAB can add 10-20% to the fair value of intangible assets, which materially affects both the purchase price allocation and the subsequent amortisation charges reported in the income statement.

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