Following the 2024 budget announcements, there has been quite a bit of concern from the farming community about how their land is going to be taxed.
Essentially, farmers never used to pay inheritance tax on agricultural and business property that they inherited. So, a family farm would smoothly pass from parents to children without there being any inheritance tax upon death.
This is due to change.
Going forward the plan is that inheritance tax will be due upon inheriting agricultural and business property, at a potential rate of 20% of the property value. The tax will not be applied to the first £1m of agricultural and business property.
One of the key ways to prepare for inheritance tax is to arrange life insurance that can be used to pay the bill when it’s due.
Let’s look at how life insurance can help farmers facing inheritance tax.
Types of Life Insurance
There are many insurers offering life insurance in the UK.
Generally, life insurance is one of the simplest insurances to look at because it does what you expect: if you die the life insurance pays out. When it comes to inheritance tax planning there are a couple of ways that it can get a bit more complicated.
Here are two life insurance policies that can potentially be used for inheritance tax purposes:-
Whole of Life Insurance – this is the one that you ideally want. The life insurance will be active until you die, there is no set end date, and because of this it is far more expensive than term life insurance.
Term Life Insurance – this can be used but is not ideal. This policy does have an end date and if you live past the policy end date, you are no longer covered. This makes it far cheaper than whole of life insurance, as there can be a good chance that you will live beyond the policy ending.
Modern life insurance policies also don’t have any cash-in value, so if you live past the policy end date there is no return of premiums or any kind of investment building whilst the policy is in place.
It is worth looking at all options that are available to you.
Whole of life insurance can be offered on a reviewable or guaranteed premium basis.
Taking it back to basics, reviewable premiums start off nice and cheap but will get higher over time and often become unaffordable at some stage.
Guaranteed premiums are much more expensive from outset, but you know that they will not change over time and you can plan the cost into your budget.
When looking at options you can consider both before making any decisions
How Does the Money go to the Right Person?
To protect against farmers inheritance tax bills with life insurance, you must make sure that your policy is written in to Trust. This is a legal document that states exactly who is going to benefit from the policy.
In Trust, money goes to who you want it to go to and the life insurance does not form a part of your estate
Not in Trust, money from your life insurance policy goes into your estate and simply adds to value of it
It is completely pointless to set up a life insurance policy for farmers inheritance tax purposes and not place it into Trust. You are wasting your money and causing higher tax for your loved ones.
By using advisers like ourselves, we will make sure that the right Trust is chosen for you, as some will not do what you are intending them to do.
You also need to be mindful of terminal illness benefits that come with most life insurance policies, and how the Trust handles these.
If the wrong option is chosen, the life insurance may be added to your estate, even if you have placed the life insurance into Trust.
Which Insurer is Best?
Unfortunately, there is no right answer to this. The choice of insurer that you can use for farmers inheritance tax will start to significantly reduce as you get older. The quicker it is secured and the younger you are, the more options you’ll have.
You tend to have more options if you look at term life insurance, but you really do want to avoid this and get whole of life insurance where possible.
Your health will also play a big role in which insurer will be right for you. So having a good knowledge of what health issues need to be considered is wise from outset.
How Much Does it Cost?
Always a question asked by all clients, and one that is very tricky to answer at outset.
Your age, height, weight, smoker status, health, family medical history and more, all have a part in determining the price of your life insurance for inheritance tax purposes.
When it comes to arranging life insurance for inheritance tax planning it is better to start getting on top of things as soon as you can.
Life insurance is cheaper the younger you are and if you wait you are only going to get older, and you might also develop a health condition that could make life insurance far more expensive.
We arrange life insurance every day and know the best ways to protect you and your loved ones.
Get in touch with our friendly and knowledgeable team for more information.