Three types of inheritance tax relief available for forestry businesses

04.07.19

The UK forestry sector is currently in a strong commercial position, particularly when compared with other industries. This can be seen in the increased profits and turnover figures being reported by forestry management companies and downstream users such as timber processors.

The prices being exchanged for established forests continue to rise; a trend that has been visible for several years. There are several factors behind this, including growing and diverse demand for wood products and a favourable tax regime. The weak pound also makes domestic timber particularly attractive at the moment, thereby increasing investment interest in the sector.

The sale of farmland in Scotland is also largely being driven by tree-planting opportunities, particularly for poorer quality farmland or less viable farms. There is strong Scottish Government support for new planting, and ambitious planting targets of 10,000 hectares per year, set to rise to 15,000 hectares from 2024/25. This is underpinned by an attractive grant system which the industry will be keen to ensure continues post-Brexit.

With market demand so high, many are looking at forestry as a commercial enterprise.. The inheritance tax reliefs also make it a very attractive area for investment.

Inheritance tax is payable at 40% of the value of what you own, when you die. There are three reliefs from inheritance tax for which the value of forestry can qualify:-

  1. Agricultural property relief (APR)

APR applies to forestry if it is part of a farm operation and meets all of the other requirements. It also extends to farm shelter belts, or forestry grown to provide wood for farm fencing. The relief does not cover amenity woodland. APR will not apply to forestry situated outwith the UK or the EEA.

If APR does not apply then business property relief (see below) may apply.

APR may be the better relief to claim if there is a farmhouse. A farmhouse will only qualify for relief if it is the centre of agricultural operations, so forestry operated as part of a farm can support that argument.

  1. Business property relief (BPR)

BPR from inheritance tax applies to commercially managed forestry if it meets all of the other requirements. You do not have to manage the business directly; you can instruct someone else to do it. HMRC will require a management plan for timber production, budgets and accounts, to show it is commercially managed.

BPR applies where APR does not; for example to a farm which has diversified away from farming, so long as, overall, the business is wholly or mainly trading and not simply investing in land. Commercial forestry can tip the balance towards trading, and therefore capture BPR on the whole diversified portfolio of activities.

  1. Woodlands Relief

There is also woodlands relief on the value of the timber, but not on the land. This applies after five years of ownership. This is a deferral rather than a relief, deferring the inheritance tax on death until a later sale of timber. This deferral is not as attractive as BPR, which is claimed in preference if possible.

To discuss your options on inheritance tax relief, contact one of our specialists.