Hi Tutor, Kindly help me in question number 7.5 (new material) Ques: A UK life insurance company is running a slightly unusual internal linked BLAGAB fund, for which there is a single asset. The asset was purchased on 1 January 2015 for £2,000. The current quoted price of the asset is £3,000. The company expects the asset value to grow at 10% pa until it is sold in one year’s time. It is expected to produce no income. Calculate a possible allowance for deferred tax, assuming the indexation allowance was 3% pa throughout the period from asset purchase to year end 2017 and using a tax rate of 20%. My understanding is As of today: Unrealised Gain is £3,000 – £2,000 × 1.033 = £814.55 at tax rate 20% Then why are we discounting it back by 1 year at the rate 8% (i.e. 20% of 10%). I dont get the logic
This is because this is the rate the asset would earn, ie the investment return would incur a tax charge of 20% so the asset would only earn a net return of 8% not 10%.
... and because we need to apply one year's worth of discounting since the question states that the company expects the asset to be sold in one year's time. Tax on capital gains on assets such as equity and property is only payable when the gain is actually realised. So the tax liability that has been accrued on the current unrealised gain won't actually need to be paid until one year's time. Its current value is therefore the amount of tax due discounted by one year, at the rate of return expected to be earned on the assets.
