Can you help the environment and save some tax? Laura Schofield from Ware & Kay Solicitors considers inheritance tax planning and woodlands.
Brief inheritance tax position
Inheritance Tax is a tax on the estate of someone who has died.
Inheritance tax can be complex but the rate of tax is 40%, above the ‘nil rate band’ on which there is no inheritance tax to pay – this band depends on the individual’s family circumstances and assets.
Bob has never married and has no children. When he dies, his estate is worth £1,500,000.
£1,500,000 less £325,000 = £1,175,000
subject to IHT @ 40%
= £470,000 tax to pay
However, on top of the nil rate band there are other reliefs and exemptions that can, with careful planning, be used during lifetime or in a Will to reduce Inheritance Tax. One topic that is becoming more well-known is investing in woodland.
Investing in woodland, or reviewing what you do with your existing woodland, can be a useful estate planning strategy – leaving more for you to pass to the next generation or other chosen beneficiaries.
Is it a business?
Woodland may qualify for Business Property Relief if it is commercially owned and managed as a business.
Examples of businesses that could qualify include woodland used for camping, fishing, or where the timber is being generated for sale – even if a sale may be years away or profits are not being made.
Business Property Relief can be claimed at 50% or 100% of the Inheritance Tax due – so a useful relief to have, but HMRC expect to see viable long term intentions, regular budget reviews, and a formal business plan setting out a strategy as evidence of active management.
Is it agriculture?
Woodland may qualify for Agricultural Property Relief at 100%, but just having woodland on a farm doesn’t mean it automatically qualifies. Woodland has to be occupied in a way that is ancillary to farming, such as being used to provide farm timber or a shelterbelt.
What if my woodland isn’t a business or agriculture?
There is a limited ‘Woodlands relief’ but it is much less generous than the other reliefs.
Woodlands relief means that the Inheritance Tax on timber is only due when it is sold or given away, not on death – so the estate is spared the burden of finding the money to pay tax whilst the woodland is unsold.
However it doesn’t apply to lifetime gifts (only on death), it only applies to the value of timber (not the land!) and is a deferral of tax rather than an exemption: worth considering, but not always useful.
So when the value of timber is increasing it may be better not to claim the deferral, as then more tax may be due!
Other tax benefits
Income from timber sales is not liable to Income Tax, and increases in the value of the timber (not the land) is free of Capital Gains Tax – for more advice you would need to speak to an accountant.
Helping the environment
Of course as well as these tax benefits, investing in woodland is a great way to help the planet – soaking up carbon emissions and providing a habitat for wildlife!
Investing in woodland has great potential – but expert advice should always be taken on your individual circumstances.
To discuss woodlands or other estate planning matters, contact Laura Schofield at Ware & Kay’s Wetherby office on 01937 583210 or email firstname.lastname@example.org