The past year has seen a series of legislative changes in progress or put into effect that impact those who are involved in the forestry sector. Those include new holiday pay rules for workers, a more robust approach to wildlife crime, and land reform proposals that impose obligations on owners of large landholdings, including commercial forests
Looking ahead to 2025, upgrades to the electricity grid network will continue to come into contact with forestry areas, and so will be an important consideration for landowners. The recent Autumn Budget from the UK Government also means further changes for some individuals and businesses operating in, or investing in, the sector. In this final edition for 2024, legal experts from Brodies cover some key topics that will impact the forestry sector into 2025 and beyond.
What is the impact of the UK budget on inheritance tax (IHT) on forestry?
The UK Autumn Budget for 2024 made changes to IHT. For those people who have invested in forestry, this impacts on those investments by reducing Business Property Relief (BPR). Currently, IHT is paid on death on the value of assets. The rate is 40%. It has been possible to claim IHT relief on forestry and pass the asset on to the next generation without any IHT being payable, due to BPR (if it is available in the circumstances). The rate has effectively been 0%. The rules for when BPR applies at all, have not changed. BPR has, however, been restricted and reduced. For deaths on or after 6 April 2026, it will be available but only up to a value of £1 million. That £1 million limit applies to all property claiming that relief and also includes any assets claiming agricultural property relief. The excess value over £1 million can only qualify for relief at 50%. Therefore, the value of qualifying assets over and above £1 million is taxed at an “effective rate” of 20%. Moving from 0% tax to 20% tax will impact upon cashflow if someone dies, and upon the availability of resources to pay IHT without selling assets that a family wishes to keep. The £1 million allowance is not transferrable between spouses; however wills could be reviewed and possibly re-written to use up two allowances. It may be possible to take action before 6 April 2026. That might involve a gift of some (or all) of the property. Careful consideration is required beforehand – including any asset protection issues in passing ownership and control to heirs; the capital gains tax consequences of doing so; and if you can afford to give away the asset and the associated income. It is likely that most people with business interests will need to revisit their wills and estate and succession planning to ascertain the impact of the changes. New plans may be required – this might involve lifetime giving to spread ownership more broadly among the family, or obtaining advice on the use of life assurance to cover the tax.
How will the UK budget changes to capital gains tax affect forestry businesses?
Forestry as a business is unlikely to be heavily affected by the changes to capital gains tax (CGT), though there will be some minor impacts.
- The main rate of CGT increased as of 30 October from 20% to 24%. This new rate effectively applies to all capital receipts except for payments of carried interest to fund managers.
- However, the wider tax treatment for commercial woodlands remains intact. This means that on disposal of a commercially-operated forest, any standing and deadfall timber remains outside of CGT, and only the underlying land is subject to tax.
- Other capital assets and machinery used in commercial forestry will be subject to the higher rate of CGT, and without the ability to claim capital allowances against the initial expenditure.
- Rollover Reinvestment Relief is still available, which means that forestry businesses disposing of capital assets and forest sites can shelter some or all of their taxable gains by reinvesting the sale proceeds into new woodlands and assets. Provided the reinvestment is made in the one year before or three years after the date of the sale, relief should be available.
- There is no change to the CGT base cost uplift on death, meaning that any gains on inherited woodlands remain wiped out.
- While the rate of tax for businesses qualifying for business asset disposal relief (or BADR, the successor to Entrepreneurs’ Relief) are increasing, this is of minimal impact to forestry. Most forestry businesses will not qualify for the relief: it is only available to activities which constitute a trade for income tax purposes and the “commercial occupation of woodlands” is specifically excluded from the relevant definition of trade. Some businesses which comprise some forestry (but no more than 20%) alongside other activities may of course still qualify. The rate of CGT for disposals qualifying for BADR rose to 14% on 30 October 2024 and will rise again to 18% from April 2026.
What do landowners need to know about the planned upgrades to the electricity grid network - and how will they impact on forestry?
This year we have seen an increase in landowners being approached to enter into option agreements, or in some cases being asked to directly grant wayleaves and title rights, to facilitate the development of power lines on their property. In Scotland, agreements will either be with SSEN Transmission or Scottish Power Transmission, depending on the location of your property. There are several considerations for landowners prior to entering into any such agreement. The most obvious point to consider is the level of compensation that should be payable by the developer as it is extremely likely that felling will be required on the property to create the necessary “corridor” for the power line. Felling may also be required to facilitate access to the development corridor, unless the developer is able to use existing access roads. If access can be taken using existing accesses, legal agreements should also include provisions to ensure forestry operations are not disrupted. This may mean agreeing protocols around the nature and timing of any access and maintenance provisions for any damage caused to access routes. The key to agreeing the above points, alongside other protections that may be required, is for the landowner and their professional advisers to engage early with any approach to balance the landowner’s interests with the rights sought by the developer. If the landowner does not engage on a consensual basis, the developer may fall back to the “necessary wayleave” process. This sets out a strict 21-day timescale in which to agree a voluntary agreement, failing which the developer can apply for Scottish Ministers to grant a “necessary wayleave”. These wayleaves will generally reflect a developer’s standard terms and there may be costs associated with the application and process, which will not be met by the developer. For those reasons, you should always engage with professional advisers immediately following an approach from a developer.
