How to calculate the value of a limited interest
Valuation of Limited Interests
Schedule 1 Capital Acquisitions Tax Consolidation Act, 2003.
Where less than absolute ownership is conferred by a benefit, a limited interest is taken. A limited interest may, for example, be a life interest or an interest for a period certain.
Where a benefit is a limited interest, its taxable value and hence the amount of tax payable, is less than it would be if an absolute interest was taken. In essence, because the benefit is not absolute, the beneficiary will not be taxed on the full market value of the property. The value of the property for tax purposes in such cases will depend on a number of things:
In the case of a life interest -
- on the age and gender of the beneficiary.
In the case of an interest for a period certain -
- on the number of years for which the benefit is taken
Actuarial factors (covering age, gender and the number of years for which a benefit is taken) to be used in determining the taxable value of a limited interest are set out in the Schedule 1, Capital Acquisitions Tax Consolidation Act, 2003
. Also included are the rules for valuing interests for joint lives, the longer of two lives, period certain interests etc.
You will notice a number of things:
- the younger the beneficiary, the higher the actuarial factor and, therefore, the closer to the full market value the benefit will be;
- the older the beneficiary, the smaller the factor and, therefore, the smaller the taxable value of the benefit;
- the factors are higher for women than for men on the basis that, statistically, women live longer than men.
The following examples illustrate, using the actuarial factors, where appropriate, the calculation of the taxable value in a range of scenarios involving limited interests.
The life, period certain, and joint life factors mentioned in the examples below can be found in the above Schedule.
Example 1
Absolute Interest
Mary Jones inherits absolutely the residue of the estate of Barry Hickey consisting of €100,000 in stocks and shares on condition that she pays €15,000 to a specified Irish charity. The costs and testamentary expenses of the estate amounted to €10,000. The taxable value of Mary's absolute interest is calculated as follows:
Market Value of property €100,000 Less liabilities costs and expenses €10,000 Incumbrance-free value € 90,000 Less deduction for consideration €15,000 Taxable value € 75,000
Example 2
Life Interest
Brian Smyth, who is 37 years old, takes a life interest in investments from Carmel Murphy. The market value of the investment fund at the valuation date is €500,000. The costs are €1,200 and it is a condition of the inheritance that Brian pay €2,000 to Carmel's niece.
The calculation of the taxable value of the inheritance is as follows:
Market Value €500,000 Less liabilities, costs and expenses € 1,200 Incumbrance-free value €498,800 Multiply by appropriate age factor x 0.8626 Value of limited interest €430,265 Less consideration €2,000 Taxable value €428,265
Example 3
Period Certain
Michael Donnelly transferred a house to his brother, Alan, until his niece, Lucy, attains 21 years of age when the house is to become Lucy's. The market value of the house is €100,000. Alan incurs costs of €3,000.
In calculating the taxable value of Alan's gift in this case, one must establish the period certain for which Alan will take the benefit (before Lucy reaches 21 years) - in this case it is for five years and 99 days.
Market value €100,000 Less liabilities, costs and expenses €3,000 Incumbrance-free value €97,000 Calculation of the limited interest for the period certain Multiply by appropriate factor for 5 years i.e.
€97,000 x .2869 = €27,829 Multiply by appropriate factor for 6 years i.e.
€97,000 x .3335 = €32,350 Difference € 4,521 Value of limited interest for five years €27,829 For 99 days
€4,521 / 365 x 99 € 1,226 Total €29,055 Taxable Value €29,055
Example 4
The value of an interest for the joint continuance of two lives:
An interest in a capital sum for the joint continuance of two lives is the value of an interest in that sum for the older life, multiplied by the joint factor which is appropriate to the younger life.
A house valued at €300,000 is left to John (aged 63) and Tom (aged 60) for the joint continuance of the two lives.
Market value €300,000.00
Multiply by factor for older life i.e. 0.5332 (John) x joint factor younger life i.e. 0.86 (Tom) = €137,565.60
The taxable value of the inheritance taken by both John and Tom is €68,782.80 each.
Note that normally when the first beneficiary dies, the surviving life tenant continues to have an interest in the property, either absolutely or for life (depending on the wording of the will or deed) and a further claim for inheritance tax would arise at that stage.
If, in the above example, John died after seven years, and Tom, under the terms of the will, was to continue to have a life interest in the property, a claim for inheritance tax on the entire property passing to Tom for life, from the original disponer would arise.
Market value (say) €400,000.00 Multiply by factor for Tom (now aged 67) i.e. 0.4673 = €186,920.00
This is a further benefit taken by Tom which may aggregate with the prior benefit of €68,782.80.
This would also apply in the situation described below in relation to the joint continuance of three or more lives.
Example 5
The value of an interest in a capital sum for the joint continuance of three or more lives:
The value of an interest in a capital sum for the joint continuance of three or more lives, is the value of an interest in that sum for the joint continuance of the two oldest of those lives, multiplied by the joint factor of the youngest of those lives.
Michael (aged 70), Mary (aged 60) and Clare (aged 50) inherit a house valued at €500,000 for the joint continuance of their lives.
The taxable value of the benefit is calculated as follows:
- The value of the interest in the house for the joint continuance of the two oldest lives is:
€500,000 X 0.4173 (Michael) x 0.86 (Mary ) = €179,439. - This value i.e. €179,439 is multiplied by the joint factor of the youngest life i.e. 0.92 (Clare) = €165,083.88.
- The taxable value of the inheritance taken by Michael, Mary and Clare is one third of the above figure of €165,083 - €55,027.96 each.
Example 6
The value of an interest in a capital sum for the longer of two lives:
The value of an interest in a capital sum for the longer of two lives is ascertained by deducting from the total of the values of an interest in that sum for each of those lives, the value of an interest in the capital sum for the joint continuance of the same two lives.
Martina (aged 70) and Pat (aged 60) inherit a house valued at €400,000 for the longer of their two lives.
The taxable value of their benefits is calculated as follows:
Value for Martina = €400,000 x 0.4679 is €187,160.00 Value for Pat = €400,000 x 0.5809 is €232,360.00 The sum of the values is €419,520.00 Less the value for the joint continuance of two lives i.e. €400,000 x 0.4679 x 0.86 is €160,957.60 Value of interest in €400,000 for the longer of
two lives is €258,562.40
The taxable value of the inheritance taken by Martina and Pat is €129,281.20 each.
Example 7
The value of an interest given for the longest of more than two lives:
The value of an interest for the longest of more than two lives, is valued as in example 6 above as if it were for the longer of the two youngest lives.
Martina (aged 70), Pat (aged 60) and Tony (aged 50) inherit a house valued at €600,000 for the longer of their lives.
The taxable value of their benefit is calculated as follows:
Value for Pat = €600,000 x 0.5809 is €348,540.00 Value for Tony = €600,000 x 0.7287 is €437,220.00 The sum of the values is €785,760.00 Less the value for the joint continuance of two lives i.e. €600,000 x 0.5809 x 0.92 is €320,656.80 Value of an interest in €600,000 for the longer of more
than two lives is €465,103.20
The taxable value of the inheritance taken by Martina, Pat and Tony is €155,034.40 each.
Example 8
The value of a limited interest where the interest is for a life or lives, but is guaranteed for a period certain will be the higher of
- The value of an interest for such life or lives,
and, - The value of an interest for a period certain
Mary (aged 40) receives a pension of €20,000 per annum for her life. The pension is guaranteed for 10 years. The capital value is say €250,000.
The value is ascertained as the higher of:
- €250,000 x 0.8683 (female aged 40) is €217,075
- €250,000 x 0.4913 (10 years certain) is €122,825
In this case the life interest is more valuable and tax would be chargeable on €217,075.
If Mary was aged 70, the value of the life interest would be €250,000 x 0.4679 = €116,975.
The value of €122,825 for the 10 year period certain is higher and tax would be payable on that amount.
Example 9
The value of a limited interest for which the other rules in the Schedule provide no method of valuing.
Where the amount of an annuity payable to a beneficiary has to be determined annually by the trustee the amount payable can only be determined each year. Each payment made to the beneficiary will be treated as a separate benefit on the date the annuity is paid.