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Reserving for deferred capital gains tax (an application of option pricing theory)

Published online by Cambridge University Press:  20 April 2012

M. Sherris
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Abstract

This paper sets out a framework, based on option pricing theory, that can be used to assess the value of deferred unrealised capital gains tax. In the U.K. and Australia, capital gains tax is paid on realisation of assets and the basis for determining the tax allows for inflation indexation of the cost base of the asset. Capital gains tax payments under these circumstances are shown to resemble those of a complex option. A number of theoretical approaches to the valuation of this option are discussed in the paper.

Keywords

OptionsReservesTaxValuation
Type
Research Article
Information
Journal of the Institute of Actuaries , Volume 119 , Issue 1 , 1992 , pp. 45 - 67
Copyright
Copyright © Institute and Faculty of Actuaries 1992

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References

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