Farmers Inheritance Tax Insurance

Farmers Inheritance Tax Insurance

Following the 2024 budget announced by Rachel Reeves, there has been quite a bit of worry and concern from the farming community about how their land is going to be taxed.

I’m not going to go through all the technical background to this, but essentially farmers did not used to have to pay inheritance tax on agricultural and business property that they inherit. 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% the value of the property. The tax will not be applied to the first £1m of agricultural and business.

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 take a look at how life insurance can help farmers facing inheritance tax. 

Types of Life Insurance

There are lots of 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 IHT purposes

• Whole of Life Insurance – this is the one that you want and should look for. The life insurance will carry and 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 far from 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 as 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 now, but you know that they will not change over time and you can plan the cost into your budget.

How Does the Money go to the Right Person?

To protect against farmers inheritance tax bills with life insurance you have to 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 – the 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 trained 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.

That was quite a jargon full and complicated paragraph, I’m sorry, but it’s these technical things that must be fully taken care of to make sure that your family has the right protection against the inheritance tax.

Which Insurer is Best?

Unfortunately, there is no right answer to this. The choice of insurers that you can use for farmers inheritance tax will start to significantly reduce as you get older. As an example, if you are in your early 80s and wanting whole of life insurance you will find that only Royal London and Zurich are your main choices. If you are younger than this then you should be able to access a lot more insurers.

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 instead.

Your health will also play a big role in which insurer will be right for you. As we get older it’s very common for our BMI to go up, for type 2 diabetes or breast or prostate cancer to develop and potentially even chronic kidney disease.

This last one can be a real sticking point. Chronic kidney disease is something that doctors usually aren’t too bothered about when you reach certain ages, as it is seen as a normal progression of getting older. Essentially, if your kidney function is no longer that of a strapping 20-30 year old, you can be classed as having chronic kidney disease. We then get into a debate with the insurers as your doctor might not be concerned by this, but insurers do take notice of it and it can potentially affect the premiums.

I’m saying this from experience of having applied for life insurance for someone, a report from the GP was asked for, it showed chronic kidney disease and there was quite a bit of frustration as the insurer increased the life insurance premiums by quite a bit. It’s very hard to accept a premium increase, especially when your doctor is telling you that your body is perfectly normal for your age.

I appreciate that this was a bit of a side tangent, but it’s worth being forewarned that health conditions can play a part in your life insurance options.

How Much Does it Cost?

Always a question that is asked and one that is very tricky to answer. 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.

Let’s make some assumptions. I’m going to assume that everything on the life insurance application is as expected and the life insurance policy is accepted at standard terms (basic pricing). I’m also going to assume that we have done all the calculations on the agricultural and business property and that the potential farmers inheritance tax is £150,000.

For a 76 year old non-smoker the pricing might look like this:

• Whole life insurance of £150,000, guaranteed premium – £593 per month
• Whole life insurance of £150,000, reviewable premium – £363 per month
• Term life insurance of £150,000 to age 90, guaranteed premium – £323 per month

It is worth noting that the whole of life insurance arranged at a reviewable premium is expected to change to £1,263 per month in year 10, £2,633 per month in year 15 and £3,824 per month in year 20.

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 that 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.

Our award winning advisers arrange life insurance every day and know the best ways to protect you and your loved ones.

Get in touch with us for a no obligation quotation today.

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