Thousands of farming families overpaying inheritance tax

Farmers with life insurance policies should check whether they have been put into trust to avoid an unnecessary inheritance tax bill.

Nearly 7,500 families paid inheritance tax on life insurance policies according to new HM Revenue & Customs figures, but many would have escaped a bill if their policy was written into trust.

‘Unnecessary’

Of 31,500 estates that paid inheritance tax in 2022/23, nearly a quarter of them (7,458) included life insurance policies. These policies were worth a total of £865m, meaning up to £346m of inheritance tax may have been paid unnecessarily.

That’s because life insurance policies written into trust do not normally form part of the deceased’s estate – and are therefore not be liable for inheritance tax, said Sean McCann, Chartered Financial Planner at NFU Mutual.

“Many people buy life insurance without advice, so aren’t aware that if they don’t put the policy in trust it’s included in their estate and could end up being taxed at 40%,” said Mc McCann.

Straightforward

“Putting life insurance policies into trust is relatively straightforward. If you have life insurance and it isn’t in trust, phone your provider and ask for a trust form.

“Provided you’re in good health when you put it into trust, there are normally no inheritance tax implications, as in most cases the policy has no value.

Policies could be taxed if the holder was seriously ill when they put it in trust or died within seven years. “HMRC could argue that the policy had a value when you put it into trust and seek to include that value in your estate and charge inheritance tax.

Huge difference

“Using a trust can also mean a speedier pay out in the event of a claim, as the family won’t need to wait for probate, which can make a huge difference to dependants relying on the money to cover day to day bills.”   

Inheritance tax receipts are increasing. HMRC collected £6.7bn of inheritance tax in 2022/23, a 12% increase on the previous year, says NFU Mutual. Other assets charged for inheritance tax include residential property.

“The tax-free allowances are frozen until 2030, meaning a growing number of families will be caught in the net. This makes it all the more important that families don’t pay inheritance tax on life insurance policies unnecessarily.”

Some 84% of estates paying inheritance tax in 2022/23 included UK residential property, valued at a total of £15.6bn Almost all estates paying inheritance tax included cash, amounting to £7.1bn.