Valuation of life interest
The owner of a property may desire to write a will or make
settlement deed in favour of his children. In the process, he may choose to
impose a condition that the grantor (that is, him) will retain the life interest
of residing in the property or letting out the same for rents and enjoying the
benefits and other profits accruing during his lifetime along with his wife. In
the event that his wife survives him, he can extend the condition that the
property will devolve on her and she will be at liberty to retain the property
absolutely and free from any hindrance with full power of alienation. This
condition is called life interest. During his or her lifetime, the owner of a
life interest can transfer his right for the term of his life to any other
person. The market value of the property is divided between two persons, one
with the right of use for life and another whose use commences on the death of
the grantor.
In valuing the right for life, the benefit derived from the
right during the valuation date can be assumed as the average rate. The present
value of the future benefits can thus be evaluated.
For the purpose of calculation, life right may be assumed to
continue till the beneficiary attains the age of 80 or for a period of 25 years
from the valuation date whichever gives the shorter period in any particular
case. There are different methods for arriving at the value of the life
interest.
One method would be to assume the life of the grantor as 80
years and the remainder person (settlee) will get the benefit only after the
life of the grantor. The value of the property is to be deferred for the
remaining period of the grantor. For example, assume that a person about 60
years owns a house and settled it in favour of his eldest son who was staying
with him. His other two sons have settled in the U.S. In the settlement deed
made by him, he has retained the life interest. Suppose, if the Government
acquired the property and a compensation of Rs. 75 lakhs was paid. The
compensation is to be divided between him and his son. The value of the son's
interest in the property is deferred for 20 years at a specific interest.
Assuming the interest at 8%, the value will be 0.18 x Rs. 75 lakhs = Rs. 13.5
Lakhs and the value of the interest of the settlor will be (Rs. 75 lakhs -
Rs.13.51 Lakhs) = Rs. 61.5 Lakhs.
The factor 0.18 is obtained by application of the formula
1/(1+i) where `i ` is the rate of interest and n is the no of years.
C.H. GOPINATHA RAO
The author is former National President, Institution of
Valuers.
Courtesy: Property Plus, The Hindu
http://www.hindu.com/pp/2007/04/21/stories/2007042100460300.htm
