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Julie Butler FCA of Butler & Co looks at woodlands in the context of Agricultural Property Relief.

Introduction

Guidance on the matter of forests and Inheritance Tax (IHT) has been given in both Chapter 24 of HMRC's IHT Manual (IHTM) and in the recent Earl of Balfour case where in the statement of facts it was assumed forestry qualifies for Agricultural Property Relief (APR). Perhaps then the question should be asked – when does a woodland become a forest and perhaps vice-versa? In the meantime, let’s look at the tax definition of woodlands and the allowability for IHT relief. This is a question asked with regard to small areas of woodland ancillary to the large forest.

Woodlands Occupied Supplementary to the Main Farm Activity

Chapter 24 of the IHT manual re-states IHTA 1984 s 115 and helps give clarity on “ancillary” woodlands and the availability of IHT relief:

“Definition of Agricultural Property

Agricultural property is defined in IHTA 84 S 115(2) and is restricted to property in the United Kingdom, the Channel Islands and the Isle of Man, by IHTA 1984 S 115(4). It means

Agricultural land or pasture (IHTM24042) which includes woodland (IHTM24043) and any building used in connection with the intensive rearing of livestock or fish (IHTM24044) if the woodland or building:-

• Is occupied with agricultural land or pasture, (IHTM24111) and
• The occupation is ancillary to that of the agricultural land or pasture.”

Provided the woodland is occupied as part of the agricultural operation or even ancillary to the farming then it seems appropriate to make a claim for APR. The woodland should be supplementary and/or supporting to the main activity of agriculture and it will be necessary to show evidence of this, e.g., maps, accounts and notes of how the woodland is used.

Woodland as Agricultural Property

Chapter 24 goes into more detail on the ability to claim APR on woodland:

“Woodlands

Woodland is only agricultural property if it is occupied with, and that occupation is ancillary to, agricultural land or pasture.  It will include woodland shelter belts, game coverts, fox coverts, coppices grown for fencing materials on the farm and clumps of amenity trees or spinneys.

Woodlands occupied for other than agricultural purposes such as amenity parkland or woodland used for the production of commercial timber will not be agricultural property. However, they may be eligible for woodlands relief (IHTM04371) or business relief (IHTM25251).

This will also be true of agri-environmental schemes (IHTM24055).”

This should be evidenced where possible with photographs and the evidence of fencing, etc., should be shown.

Thus if there is a commercial timber operation then the IHT claim should be for Business Property Relief (BPR) as opposed to APR.

Activities that go Beyond Occupation of Woodland

The owner-occupier of woodlands may also carry on a trade by making and selling wooden items, marketing firewood or even selling processed timber. Is this agriculture? The occupation of woodland is essentially the growing of timber and the normal preparation for marketing timber as timber. Once processing progresses beyond the planking stage it is not regarded as being part of the occupation of the woodlands, i.e., it is not agriculture, however it may well qualify for BPR.

The Impact of the Jäger Case

The decision in the European Court of Justice in Jäger, the European Commission suggested that the UK’s IHT Agricultural Property Relief should be made available for farmland in the European Economic Area (‘EEA’).  The European Commission also suggested that the IHT relief under IHTA 1984 s 125 (woodlands deferral relief) should also be made available for woodlands in the EEA. There are many tax advisers who would not consider this decision significant as BPR would have been claimed.

New Woodland

What about new plantation under the agricultural/environmental schemes?  Does this qualify for APR?  Chapter 24 gives guidance here:-

“Farm Woodland Premium Scheme and other agri-environmental schemes

There are many other agricultural/environmental schemes that can apply to agricultural land.

The Farm Woodland Premium Scheme is administered by MAFF, now DEFRA, and exists to promote the establishment of woodland by offering annual payments to compensate for the agricultural income foregone. It is only available to farmers who must at the same time apply for grants under the Woodland Grant Scheme, the reason being that the environmental and silvicultural standards of the latter must be satisfied before an FWPS application can be approved.

The Scheme is open to farmers who, either personally or through a manager, run an agricultural business that includes the land to be converted to woodland. Agriculture is defined in the Rules and Procedures and is broadly in line with that included in IHTA 1984 s 96(1) AHA 1986; keeping horses for recreational and/or sporting purposes is specifically excluded, as is fish farming.

Once accepted into the scheme the woodland must be maintained in accordance with good forestry practice and not returned to agricultural use for at least

• 30 years after planting in the case of woodland receiving payments for 15 years (generally more than 50% by area with broadleaves);
• 20 years in the case of woodland receiving payments for 10 years (generally 50% or less by area with broadleaves).

Agricultural relief cannot be available as the whole purpose of the Scheme is to take land out of agriculture.

You should refer any cases involving schemes not covered by these instructions where it appears that the land is not occupied for agricultural purposes (IHTM24101) to TG (Technical Group).”

Thus, if APR cannot be claimed because they are taking land out of agriculture then tax relief must be obtained from woodlands deferral relief or BPR but what is the most beneficial?

There have been those who promote that for successors to the land the FWPS grant continues but as this is not received as compensation for their loss of farming income (because they have never had any farming income from the woodland) the grant is deemed to arise from the woodlands themselves and is therefore exempt as normal woodland income.

Care must be taken for two reasons. Firstly, where expenses could exceed income, the tax loss opportunity could fail (the losses might not be allowed) and secondly, there could be concerns over the availability of BPR. A clear example of how all tax planning needs to be looked at in the round.

Woodlands and Deferral Relief for Inheritance Tax

Woodlands are exempt for deferral relief under IHTA 1984 ss 125, 127 and 128, but with the alternatives of APR or BPR at 100% does deferral really present the most tax efficient alternative? It is hoped that this article shows the ability to claim APR and BPR. 

If APR is not available try BPR? There is no question over the fact that deferral is the third choice. The first is APR, the second is BPR under IHTA 1984 s 110 as part of the “net” business and, lastly, deferral. It is considered that the deferral relief is a tax relief of “last resort” when there is no possibility of APR or BPR - perhaps where areas of woodlands and forestry are purchased in isolation. The relief does provide a deferment of tax until the timber is felled, but a “tax penalty” is exacted under IHTA 1984 ss 126 to 128.  The disposal proceeds are taxed as if they formed the part of the estate in respect of which the relief was claimed and therefore taxable at the highest marginal rate of IHT. In effect, the heaviest tax charge is levied on something which was not even part of the estate, namely the growth which has taken place after the death. It would seem deferral relief is to be avoided at all costs and the tax planner must look to APR, BPR as a preferred choice.

Ancillary to Agriculture and Part of the Main Business

Clearly the key to being able to claim APR and BPR on woodland and forestry revolves around the agricultural activity that the woodland supports and the ability to establish a business that the woodland is part of.

It is assumed that in the case of the Earl of Balfour the agricultural activity was so large that even the Scottish forestry was “ancillary” to the agricultural activity and clearly not all newly planted under DEFRA grants to replace agriculture. But what of the majority of small and large woodlands?

Action Plan

Review all areas of woodland, new planting, forestry on all clients – those who consider themselves involved in farming and those who have just invested in long-term forestry, and ensure the client is aware of the benefit but complexity of reliefs available.  Ideally this should be linked to farm maps and cross-referenced to accounts and photographs.

The purpose and use of all the woodland must be clearly identified, understood and reflected in the accounts and the income tax computation.