James Bailey looks at possible inheritance tax reliefs in respect of woodlands.
You may have wondered why so much of Britain, particularly the north of England and Scotland, is covered with blocks of forestry. This article may offer part of the answer.
Income and expenditure on woodlands is entirely outside the scope of income tax (or corporation tax, if owned by a company). If you make profits, they are not taxable; if you make losses, they cannot be set against other income. You cannot claim capital allowances on your lumberjack’s axe.
Below are three possible ways in which woodlands may escape inheritance tax (IHT) on your death.
1. Business property relief
If you manage the woodlands commercially, with a view to making profits, and have owned them for two years when you die, business property relief (BPR) will mean that there is 100% relief available and no IHT will be payable.
It is important to remember how the BPR rules work. For example, if you are a sole trader, there is unlikely to be a problem, but if the woodlands enterprise is a partnership, then make sure the woodlands are owned by the partnership rather than by an individual partner or by some of the partners. If the woodlands are not a partnership asset, then BPR is only available on 50% of the value.
2. Agricultural property relief
Woodlands are not automatically regarded as agricultural property. They will only qualify for agricultural property relief (APR) if they are ‘ancillary’ to farmland. Examples of woodland that is ‘ancillary’ to farming in this way include trees used as shelterbelts, as cover for pheasants, or as ‘amenity’ woodlands. Commercial forestry is not agriculture – though as we have seen above, it may qualify for BPR.
‘Short rotation coppice’ woodlands do qualify as farming and will qualify for APR. ‘Short rotation coppice’ farming means intensive planting of trees at high density, which are harvested after no longer than ten years.
The important difference between BPR and APR is that you can qualify for APR as a landlord, rather than having to occupy the woods yourself for your own trade. Provided the woodlands are occupied by the farming tenant, and are ‘ancillary’ to his farming as described above, or are managed as ‘short rotation coppice’ then they will qualify for APR once you have owned them for seven years.
If the tenant manages the woodlands on a commercial basis, growing and selling the timber, this is not farming and you will not qualify for APR. Furthermore, as the landlord, not the trader, you will not qualify for BPR either.
3. Woodlands relief
If all else fails, there is a special IHT relief for woodlands, available if neither APR or BPR applies.
In order to qualify for woodlands relief, at the time of your death you must have owned the land concerned for at least five years if you bought it, but if you acquired it otherwise than by purchasing it (for example, by inheriting it or by a gift) there is no minimum ownership period.
The executors of your estate must claim woodlands relief. It defers IHT on the value of the trees (not the land they stand on) until they are sold or given away. If they are given to the new owner’s spouse or civil partner, there is no charge, and if the new owner dies still owning them (the same trees, remember, not just the same land), then again the original charge is extinguished.
Practical Tip:
Owners of woodlands should try to ensure they qualify for either BPR or APR – both are more generous than the specialised IHT relief for woodlands.
