I am now in my early 90s and I am making plans to transfer assets to my two children. My biggest asset, which accounts for most of my wealth, is my home.
This is a four-bedroom property in almost 100 acres of woodland. The size of the surrounding woodland means a significant proportion of value is locked up in the land, as well as the property.
I know there are certain IHT reliefs for woodland, but how can I qualify for one of them? Do I need to split the ownership of my home and land to qualify? And what risks are there to doing this?
Inheritance tax planning is an important consideration for individuals whose estates will exceed the available nil-rate bands.
The family home may be gifted to a younger generation as part of inheritance tax planning, says Lucy Brennan, partner in the private wealth group at Saffery Champness. But this will be deemed to be a transfer of value which could become chargeable to IHT if you as the parent dies within seven years. The seven years starts from the date of the gift.
If the main family home is gifted, the parents must pay a fair market rent if they continue to live in the property, otherwise it would be considered a “Gift with a Reservation of Benefit” and fall back into their estate for IHT purposes on death. This therefore needs careful consideration. There is unlikely to be capital gains tax on the disposal if it has always been the main home.
There are various IHT reliefs available for woodland. These depend upon how the woodland is maintained, namely whether it is deemed to be of a “commercial” or “amenity” nature. A commercial woodland will be run with a view to realising a profit, albeit in the long term. This would include, for example, selling timber, firewood or woodland products. There would need to be clear management objectives. Conversely, amenity woodland is deemed to be anything else: being not commercially managed, nor occupied as part of a wider farming business.
Commercial woodlands owned for more than two years should be eligible for 100 per cent business property relief (BPR). This reduces the value of a qualifying business asset to nil in the IHT account: as a result, no IHT will become payable on the asset in question. Alternatively, 100 per cent agricultural property relief (APR) may apply in certain situations.
There is a special IHT relief available for commercial or amenity woodlands owned for more than five years where neither BPR nor APR apply. Woodlands Relief is a deferral relief which allows the value of timber within the woodlands to be excluded from the estate on death. When the timber is subsequently disposed of (whether by sale or gift), inheritance tax is charged on the value received. The value of the underlying land is chargeable to IHT as part of the death estate, rather than the value of the woodland as a whole. As a deferral relief, this is less preferable than BPR or APR, but provides a useful planning point.
John Brien, senior adviser at Progeny Private Law, says that rather than splitting the woodland and the house — which would be complex and unlikely to help your tax position — you might start commercially managing the woodland, perhaps by thinning the trees and selling the timber, while maintaining accounts. If this has been under way for two years when you die then BPR should be available to you, with IHT only being liable on your home.
A woodland management plan approved by the Forestry Commission may enable you to obtain grants, which would further help to prove the woodland is run as a commercial operation.
If none of the above reliefs are available, it is unlikely given your age that gifting the woodland in your lifetime would be tax efficient. Only gifts made seven or more years before your death are entirely exempt from IHT. On making the gift you would also be liable for capital gains tax (CGT) on the increase in the value of the woodland while you owned it.
There is an exemption from CGT when you sell or gift your main residence. This exemption also extends to the garden or surrounding land but is unlikely to extend to 100 acres and anyway commercial woodland would not be regarded as part of a garden. 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.
The opinions in this column are intended for general information purposes only and should not be used as a substitute for professional advice. The Financial Times Ltd and the authors are not responsible for any direct or indirect result arising from any reliance placed on replies, including any loss, and exclude liability to the full extent.
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