How to calculate the value of Rights of Residence, Support and maintenance
Rights of Residence, Support and Maintenance
Entitlement to a right (e.g. a right of residence, support or maintenance ), constitutes a benefit. This benefit must be capitalised in order to ascertain the market value to be included in your return. There are two ways of calculating the market value of the benefit, depending on whether the benefit is charged on property or not.
However, before we consider how the taxable value of such a benefit is calculated it is important that we understand the difference between a right to reside in property and having a life interest in property. A right to reside is a right to live in property only. This right is usually a charge on property. A life interest in property means that the person with the life interest effectively owns the property for his or her life. An exclusive right to reside in a dwelling-house, is equivalent to having a life interest.
Benefit charged on property
The following formula should be used to calculate the market value of a benefit charged on property e.g. a right of residence
Annual Value of Right /Annual Value of Property x Market Value of Property upon which the right is charged
On the death of John Ryan, his nephew Tom inherited the deceased’s house. It was provided in the deceased’s will that his sister Mary (aged 60), be entitled to a right of residence in the house for her life.
Market value of house is €200,000
Annual value of right of residence is €2,000
Annual value* of the house is €20,000
Market value of benefit taken by Mary:
€2,000 /€20,000 x €200,000 = €20,000
*The rent which would be obtained if the property was let on the open market.
The value of the benefit taken by Mary is €20,000. However as Mary only has this benefit for her life, in order to calculate the taxable value of her benefit, the market value is multiplied by her age factor (see Schedule 1 of the Act) i.e. €20,000 x 0.6475 = €12,950.
It should be noted, that when the return for Tom is being completed, the benefit taken by Mary can be deducted as a liability. Note that it is the market value of the benefit i.e. €20,000 and not the taxable value of the benefit i.e. €12,950 that is deductible.
In practice, Revenue will allow a deduction of one-tenth of the market value of the dwelling-house where there is a right of residence and a deduction of one-fifth of the market value of the property where there is a right of residence, support and maintenance. Note however that whatever method is used for calculating the deduction for the rights, the same method must be used for calculating the value of the cessor of these rights (see below). Note that a benefit of rights charged on property may qualify for agricultural or business relief.
Benefit by Reason of the Cessor of Reserved Rights
When rights come to an end, e.g. when a person, having a right of residence, support and maintenance, dies then the original beneficiary i.e. the person who took the property subject to the rights, takes an inheritance of the cessor of those rights from the original disponer. Remember, that the original beneficiary will already have been allowed a deduction for these rights.
In order to calculate the market value of this benefit, we again use the formula;
Annual Value of Rights /Annual Value of Property x Market Value of Property on which the rights are charged
Note that the values used are as at the date the rights ceased to exits.
The facts are as in the previous example. Mary dies and on her death Tom takes an inheritance of the value of the cessor of the rights of Mary from the original disponer, John Ryan. The values at the date of death of Mary are as follows:
Market value of house €300,000
Annual value of right of residence €3,000
Annual value of house €30,000
Market value of the benefit taken by Tom is:
€3,000 /€30,000 x €300,000 = €30,000
The value of the benefit taken by Tom, on the death of Mary, is €30,000.
Under the rules of aggregation, the benefit of €30,000 may aggregate with the earlier benefit taken from John on his death and for which a return will have been delivered previously. Note that if the method used for calculating the deduction for Mary’s right of residence originally, was to take one-tenth of the market value of the dwelling-house, the same method must be used in valuing the cessor of those rights, i.e. one-tenth of the market value of the dwelling-house.