Senior Adviser John Brien discusses the issues around inheritance tax planning for properties with woodland
The Financial Times contacted me earlier this month when their ‘Your Questions’ feature was asked about the implications of owning woodland for inheritance tax relief. A reader wanted to know whether they qualified for woodland inheritance tax relief, and the best ways to transfer this land to their children. Their home is their biggest asset, a four-bedroom property in 100-acres of woodland and represents a large proportion of their total wealth. Inheritance tax planning is an important consideration for individuals whose estates will exceed the available nil-rate bands.
The reader wanted to know whether they needed to split the ownership of the home and the land to be able to qualify for inheritance tax relief. In the first instance, I explained that splitting up ownership of the house and woodland would be time-consuming, complex and unlikely to help their tax position and, as such, I would advise against it. I suggested that they could think, instead, about starting to commercially manage the woodland, perhaps by thinning the trees and selling the timber, while maintaining accounts. If the owner of woodland has been doing this for two years by the time they die then they should be eligible for 100 per cent business property relief. Then, when they die, inheritance tax will only be liable on their home. A woodland management plan approved by the Forestry Commission may enable woodland owners to obtain grants, which would further help to prove the woodland is run as a commercial operation.
The person who had asked the question was in their early-nineties, which was something important to bear in mind. In their case, given their age, it is unlikely that gifting the woodland in their lifetime would prove to be tax efficient. Only gifts made seven or more years before your death are entirely exempt from inheritance tax. What’s more, on making the gift you would also be liable for capital gains tax on the increase in the value of the woodland while you owned it. There is an exemption from capital gains tax when you sell or gift your main residence. This exemption also extends to the garden or surrounding land but it is unlikely to extend to 100 acres of woodland. What’s more, commercial woodland would not be regarded as part of a residential garden.
The reader had also enquired about the sort of risks that might be involved in gifting land or transferring the home between generations as an asset. My advice is that making a sizeable gift is a decision which should not be taken lightly even in the most harmonious of families. Generally speaking, the family home should be one of the last assets to be involved in a tax mitigation strategy. At Progeny Private Law, we can provide inheritance tax planning support whatever your individual situation might be. If you would like to discuss your requirements further, please get in touch.
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