Valuation of life interest in property

helloall

Firstly,I hope this is the right forum to post this. I'm trying to find out how to value the remainder of a life interest in property and would be grateful for any help.

This is the situation:

A property owner accepted an amount of money from a married couple (both retired) in exchange for a permanent licence to occupy (accommodation for life / life interest) in an agreed part of the property. After ten years of living at the property, they have announced that they are divorcing. One of them wants to emigrate and is asking for a lump sum in return for him giving up his life interest in the property. His wife wishes to remain living at the property as agreed.

I've looked at The intestate Succession (Interest and Capitalisation) (amendment) Order 2008:

http://www.legislation.gov.uk/uksi/2008/3162/pdfs/uksi_20083162_en.pdf

but have been led to understand that those tables are only for calculating cases of intestacy.

Does anybody have an idea how to calculate the remaining capital value of a persons life interest in property, given the details above?

Thanks in advance.

vectistim

How was the original lump sum determined?

I'd be inclined to value it as though it were an income source,
eg: Market rent £x pa, halve that, estimate number of years of life left -n, convert £x/2 pa for n years into a lump sum by using an appropriate discount rate.

Alternatively you could look at the initial lump sum and initial anticipated lifetime, cut it in half, and then reduce it based on the first ten years.

You could get a proper valuation surveyor in to do lots of calculations, but in the end the question comes down to how much does the husband want and how much is the wife prepared to pay.

helloall

vectistim wrote: »

How was the original lump sum determined?

I'd be inclined to value it as though it were an income source,
eg: Market rent £x pa, halve that, estimate number of years of life left -n, convert £x/2 pa for n years into a lump sum by using an appropriate discount rate.

Alternatively you could look at the initial lump sum and initial anticipated lifetime, cut it in half, and then reduce it based on the first ten years.

You could get a proper valuation surveyor in to do lots of calculations, but in the end the question comes down to how much does the husband want and how much is the wife prepared to pay.

Thanks vectistim,

They determined the amount they would be willing to accept, by taking a realistic annual rental income, and multiplied it by a realistic remaining life expectancy, in years, for the both of them (both were newly retired and in good health at the time of the agreement).

I didn't quite understand your first valuation formula - to keep the calculations simple (for me!), taking the numbers below as a hypothetical example:

Lump sum - £100,000
Realistic annual rent - £10,000
Ages when agreement started - man 65, woman 60
Years already residing in property to date - 10 years

what would you calculate as the mans remaining life interest in capital value?

One last question, you mention getting a proper valuation through a valuation surveyor - would that be the person to do this or an actuary?

Thanks

vectistim

That's essentially the same thing, it's just using a discount rate says that £5,000 in ten years time is worth less to me than £5,000 right now.

There's a simple calculator for this here:
http://financialmentor.com/calculator/present-value-of-annuity-calculator

So I look at a mortality table and see that the average 75 year old chap is expected to last another 11 years.
Potentially I could just go £5,000 x 11 = £55,000
Or I could apply a discount rate, say 3.5% (as used by HM Treasury), so what the calculator will then do is reduce the value of each future year by 3.5% and then add them all up, so

Year 1: £5,000
Year 2: £5,000 x 96.5% = £4,825
Year 3: £4,825 x 96.5% = £4,656
etc.
And using the linked calculator that comes out about £45,000
(This is ignoring that the future rental value might be more)

I would say a proper valuation surveyor, they are used to valuing funny bits of income from land[1], certainly an actuary will be able to do the same calculations, but instructing one might be harder and they might not do as good a job on assessing the correct rent to use.

Whilst we can put a number on it in this way, in reality it feels fairly meaningless to me. If the husband surrenders his rights to the landlord the landlord gains nothing (the wife's interest will probably last 6-7 years longer) so any payment would be from the wife for him to move out. However, as she has a life interest, apart from not having him hanging around she doesn't gain anything by buying him out (unlike buying someone's share in a property - the life interest isn't (I hope for the landlord) transferable or saleable). If he is moving out anyway it seems to come down very much to how much she is prepared to give him, unless this is needed for divorce court purposes, in which case a surveyor's imprimatur would have to be the way to go.

[1] I remember some very silly exam questions along the lines of:
A rented X to B for 25 years starting 11 years ago at an initial rent of £10,000 pa with 20% rent increases applied every 5 years.
B has sublet X to C for 15 years starting 4 years ago at an initial rent of £12,000 increasing by 15% every 3 years.
Determine A and B's interest in X.

MobileSaver

vectistim wrote: »

in reality it feels fairly meaningless to me. ... the landlord gains nothing ... she doesn't gain anything by buying him out

This is the same conclusion I came to, I don't see how there is a value to anyone for solely the man to give up his life interest (unless the original agreement was that it was transferable.)

If it was the other way around and the woman was giving up her interest then I guess there would be some value as all other things being equal she would be expected to live longer than the man.

rochja

So he wishes to emigrate and not exercise his life interest? Why should he get paid anything to exercise that option? They entered into a contract. Hold them to it.

theartfullodger

helloall wrote: »

....

A property owner accepted an amount of money from a married couple (both retired) in exchange for a permanent licence to occupy (accommodation for life / life interest) in an agreed part of the property. After ten years of living at the property, they have announced that they are divorcing. One of them wants to emigrate .....

....

Think the more interesting question is, what were the terms of the original deal/license. If it said (say..) "for Mr & Mrs Blogs to live in together for the rest of their lives or as long as they so wish and, should one die, the remaining partner to live in alone for the rest of their life or as long as they so wish"... then when divorced neither of them would have a right to remain at all (as I understand it: IANAL).

Further, if property owner is OK with Mrs remaining I can't see why she should give him more than 5p. He wants to go, his negotiating position is extremely weak, tough...

What's he going to do if they can't agree a price - stay living where he doesn't want to? Nope, he'll go off to OZ in a huff. Mrs should sit tight & be patient and make sure she divorces him so he has no rights to return.

Cheers!

Artful (Male...)

ValHaller

I would say that the property owner should pay nothing. If Mrs Licensee stays there, as the property remains occupied, then there is absolutely no benefit to the owner from Mr Licensee moving.

That is until and unless Mr Licensee survives Mrs Licensee, at which point, it might be worth buying out Mr Licensee's interest on the basis of vectistim's calculations but without the divide by 2.

Artful is right to draw attention to the contract - although I don't see that the divorce would invalidate the agreement or the rights of either of them to stay unless this was quite explicit.

phill99

You need specialist advice. There are numerous issues surrounding this. It appears that you don't exactly know the basis on which the couple occupy. Is it a proper Life Interes or is it a licence or is it a enhance. You will need a solicitor to adise you of this. Each would be valued differently and have very different results. A licence to occupy may well be valued at zero.

A Chartered Surveyor specialising in these valuations would undertake the valuation. They use something called Parrys Valuation Tables which has a section for life expectancy for males and females.

It's not something that you would be able to do, nor most of the random (but well intended) strangers on the internet could advise you on.