This is one of a number of explanatory articles, part of a set copied under licence from H M Revenue & Customs website:
Introduction – Is Inheritance Tax due?
Calculating Inheritance Tax
Valuing assets
Responsibilities of personal representatives
Business relief and businesses
Discretionary trusts
Deceased left no will
Pensions
Agricultural relief
Deceased's liabilities
Foreign aspects
Joint property
Penalties
Settled property
Woodlands
Probate
Alter Inheritance tax
Gifts
Excepted estates
Paying IHT
Thresholds and Interest
Introduction
This guide is designed to help our customers to obtain a grant of representation, complete an account of the deceased's estate, and pay any inheritance tax (IHT) which may be due.
It also gives advice about lifetime gifts and the taxation of discretionary trusts.
This particular article addresses woodlands relief.
The proposals in the Finance Bill 2006 affect the meaning in this article regarding:
- gifts into certain kinds of trusts
- the tax treatment of trusts, known as interest in possession trusts, in which the beneficiaries have a right to benefits
- the ending of an interest in possession during a beneficiary's lifetime
- the treatment of funds in alternatively secured pensions on death.
This article will be updated as necessary when the Finance Bill is enacted.
What is woodlands relief?
There is a specific relief for transfers of woodland on death. However, this has become less important since the introduction of 100% relief for businesses that qualify as relevant business property.
Where an estate includes woodlands forming part of a business, business relief may be available if the ordinary conditions for that relief are satisfied. More about business relief.
In certain circumstances, woodlands may also qualify for the conditional exemption for national heritage property.
What is the scope of woodlands relief?
When a woodland in the United Kingdom is transferred on death, the person who would be liable for the tax can elect to have the value of the timber, that is, the trees and underwood, (but not the underlying land) excluded from the deceased’s estate.
If the timber is later disposed of its value at the time will be subject to inheritance tax. Relief is available if:
- an election is made within two years of the death, though the Board of HM Revenue and Customs have discretion to accept late elections, and;
- the deceased was the beneficial owner of the woodlands for at least five years immediately before death or became beneficially entitled to it by gift or inheritance.
Is relief available for woodlands held by a partnership?
Yes. For woodlands held by a partnership, the relief is available on the death of a partner if the terms of the partnership show that the deceased was the beneficial owner of a share of the woodlands.
When is woodlands relief not available?
The woodlands relief is not available for:
- an outright lifetime transfer;
- a transfer by a close company;
- woodlands held on discretionary trust;
- woodlands which are on agricultural property.
What charge arises on a disposal of timber?
A tax charge arises if woodlands relief has been given and the timber is later sold, given away or disposed of before the land on which it was growing is transferred again on another death.
For this purpose we treat a disposal of an interest in the timber as disposal of the timber itself. However, a disposal to the owner’s spouse or civil partner is exempt.
Once the timber has been transferred again on another death, tax is not chargeable on later disposals as this is payable on the first death. If there is any outstanding estate duty relating to any timber, an outright gift of that timber will be a chargeable transfer, not a potentially exempt transfer.
What is tax charged on?
If the disposal is a sale for full consideration in money or money’s worth, we charge tax on the net proceeds of sale. Otherwise, we charge it on the net value of the timber at the time of the disposal.
Certain expenses, if they are not allowable for income tax, may be deducted to arrive at the net sale proceeds or value. These are:
- the expenses of disposal, and;
- expenses of replanting within three years of the disposal.
The three-year time limit for replanting expenses may be extended at the discretion of the Board of HM Revenue and Customs. In practice, we will extend the time limit if replanting was delayed by circumstances outside the owner’s control. Replanting expenses, which are not allowable in one disposal, you may carry forward to a future disposal.
What is the rate of tax?
You can find the rate of tax chargeable on the disposal by treating the taxable amount as the top slice of the deceased’s estate. For this purpose, the deceased’s estate includes any sale proceeds or value charged to tax on previous disposals since the death.
If you defer tax on timber and the rates of tax are reduced before the timber is disposed of, we calculate the tax chargeable on a disposal on the scale applicable at the date of disposal.
Who pays the tax?
If the disposal is a sale, the tax is payable by the person who is entitled to the sale proceeds. Otherwise, it is payable by the person who would have been entitled to the proceeds if the disposal had been a sale - normally the transferor.
You should deliver an account of the relevant timber to HM Revenue and Customs Capital Taxes within six months of the end of the month in which the disposal occurs.
When is payment due?
If tax is payable on a disposal due to a death, the tax is payable six months after the end of the month in which the disposal occurs.
Is the instalment option available for woodlands?
You cannot pay inheritance tax by instalments if the tax is on a disposal of timber following an election for woodlands relief on an earlier death.
If an immediately chargeable lifetime transfer of woodlands also results in a deferred charge to tax on timber, because it was paid on a previous death, the tax on the lifetime transfer itself (but not the deferred charge) may be paid by ten equal yearly instalments. The first payment is due six months after the end of the month in which the transfer took place. In this case, the right to pay by instalments does not cease if the timber is later sold.
Instalments are interest-free if you pay them on time. | 
