The Chancellor's Budget on 30 October 2024 contained far reaching changes to Inheritance Tax (IHT), including a significant restriction on the application of Business Property Relief (BPR) which will take effect on 6 April 2026. This insight considers the likely impact of these changes for owners of commercial woodland.

IHT – BPR: An overview

IHT is a tax that applies, for the most part, on a person's death but it is also relevant to lifetime gifts. How much IHT is due depends upon a number of factors, including (i) to whom the assets/property are passing, (ii) whether the assets qualify for any relief and (iii) the availability of any "nil rate band". Certain assets (e.g. interests in business and shares in unlisted trading companies) may qualify for BPR. The effect of BPR is to reduce the value of qualifying assets by 100% or 50% for the purposes of IHT. When 100% relief is available, in most cases this means the qualifying assets are effectively exempt from IHT. For owners of commercial woodland or those with woodland or peatland projects registered with the Land Carbon Registry, there is the potential for 100% relief from IHT on an owner's death.

The Budget changes

The effects of the Budget changes are that for deaths occurring on or after 6 April 2026, BPR will continue to be available at 100% for qualifying assets (in circumstances where it was previously available at that level) but only up to a value of £1M. And that £1M limit is shared between both BPR assets and any other assets that qualify for the separate Agricultural Property Relief at 100%. If the qualifying assets have a value in excess of £1M, that excess value can only qualify for relief at 50%. Thus, the excess value of qualifying assets is taxed at an effective rate of 20%.

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The Budget changes

Mr and Mrs X have owned a commercial woodland in the Scottish Highlands for several years (more than the 2-year ownership period required for BPR). They have been advised that all of this land will qualify for BPR at 100%. The total value of the woodland is £4,600,000. Mr and Mrs X's succession plan is that on the death of the first of them to die, all of their assets and interests, including the woodland that they own (their "estate") will pass to the survivor of them and then, on the death of the survivor of them, their combined estate will pass to their son.

Assuming all of the usual qualifying conditions are met, 100% BPR will apply to the value of the woodland. This means that on the death of the survivor of them, under current rules, there will be no IHT in respect of the value of the land.

Under the new rules, if the death of the survivor occurs on or after 6 April 2026, 100% BPR will be capped at £1M and the balance of £3,600,000 can only qualify for relief at 50%. That leaves £1,800,000 without any relief and subject to IHT at 40%. At worst, that results in IHT to pay of £720,000. (If Mr and Mrs X both have their personal nil rate bands available that would reduce the IHT charge to £460,000.)

The beneficiaries of the estate could potentially claim IHT woodlands relief (currently not often used due to BPR), which would defer the amount of IHT attributable to the growing timber so that only the value of the underlying land would be subject to tax on the second death (subject to the same £1 million then 50% relief explained above). The deferred tax would then come into charge as the timber is sold, or on disposal of the woodlands. Note that for deaths after 6 April 2024, woodlands relief is only available on woodlands in the UK. Careful consideration should be given to claiming the relief, and it may not be practical to do so in some cases – for example, where the woodlands are owned and managed via a partnership whose membership is subject to change.

In some cases, it is also possible to elect to pay the inheritance tax due on business assets by 10 annual instalments.

Tax planning for spouses and civil partners

With appropriate planning Mr and Mrs X can reduce the IHT payable. For example, if they passed some of the woodland worth £1M directly to their son or to a trust for his benefit on the first death, then they avoid aggregating all of the value in the surviving spouse's hands. This will mean that, after the second death, £2M of woodland should have qualified for 100% relief, reducing the excess qualifying for relief at 50% to £2,600,000. (This planning is not available if the landowner does not have a spouse or civil partner.)

Planning prior to 6 April 2026

It may also be possible to take action before the new rules take effect on 6 April 2026. For example, by making a gift of some (or all) of the property currently qualifying for 100% BPR to the intended heirs such as children or into a trust. Careful consideration is required before taking any steps, for example:

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    Planning prior to 6 April 2026

    Consideration of any asset protection issues in passing the ownership and control of the relevant property to the intended heirs at this stage. Asset protection issues may include an heir disposing of an asset, bankruptcy, matrimonial and forced inheritance risks.

    The Capital Gains Tax (CGT) consequences of doing so – CGT hold-over relief is often available, deferring any CGT charge, but this also involves the loss of the CGT-free uplift on death in the donor's estate. This is perhaps less of an issue for commercial woodland where the value of the standing timber is outside the charge to CGT, and only the value of the underlying land is subject to tax.

    The personal financial and other requirements of the donor – can the donor afford to give away the assets, and the associated income, for good?

    The IHT consequences of the death of the donor in the seven year period following the lifetime gift. The new rules will apply to lifetime gifts made on or after 30th October 2024 if the donor dies on or after 6th April 2026, but within seven years of the gift.

    Longer term planning

    It is likely that most people with interests in commercial woodland will need to revisit their 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 amongst the family, the use of life assurance to cover the exposure or other options.

    What next?

    At this stage, our general view is to hold off detailed estate planning until the draft legislation is published (possibly at some point in November 2024), and, where trusts are involved, at least until the Government's planned Consultation exercise is underway (likely Spring 2025). That said, estate planning might be accelerated where there are concerns about life expectancy and in any event all those with significant interests in commercial woodland and land used in recognised carbon credit schemes should review their existing wills.

    Stay up-to-date with IHT developments

    These developments are under careful review by Brodies. If you wish to be kept updated as the landscape develops, please register for updates below. Should you wish to discuss your specific circumstances please contact your usual contact at Brodies or any one of the Personal team.

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    Contributors

    Alan Barr

    Partner

    Mark Stewart

    Head of Personal & Family and Partner