Farming families who want to provide an inheritance to all their children – but don’t want to split up the farm – should consider using an insurance policy to pay out on their death.
“It’s a common problem that parents with multiple children want to provide all of them with a fair share of inheritance, but doing so would necessitate the splitting of a farm, or levy the burden of hefty borrowings on the business to pay off non-farming descendants,” explains Mike Butler, chairman of the board at Old Mill accountants and financial planners.
“For example, where a son may take on a farm in its entirety, subject to paying his sister, say £500,000, the issue arises when the parents die, and the son has to find that money,” he adds. “He probably hasn’t got the funds in his bank account so has to borrow it – but the issue is repaying it.”
Over 20 years, a £500,000 loan at an interest rate of 3% would equate to annual payments of £32,500. However, the capital element of those repayments comes out of post-tax profits, driving the cost of repayments up to £48,000 a year in terms of pre-tax profits consumed (assuming the son is a basic rate tax payer in a partnership paying National Insurance). “How does he find enough cash to do so and generate enough profit to fund the loan repayments without starving the farm?”
This can be a costly and difficult way to inherit the family farm, so instead farmers should consider taking out whole life cover to pay out an agreeable sum on death. “Current typical market quotes suggest that a husband and wife aged 65 and in reasonable health could take out joint life cover of £500,000 (payable on the second death) for a fixed annual premium of around £12,000 a year,” explains Mr Butler. “You’re now left with a simple decision. Would the son sooner pay £12,000 a year for the duration of his parent’s life or £43,000 a year for 20 years to service the bank option?”
The figures stack up even if the parents live for a long time, he adds. “Apart from the fact that this would be good news for them, at least one parent would have to live beyond 137 years of age before the life cover arrangement became more costly. Life cover has never been as cheap as it is at the moment and subject to achieving medical underwriting, it can prove extremely good value.”