Farms are often asset rich rather than liquidity rich, and even where IHT is charged at a reduced rate, the sums involved can still be significant. This can leave families facing the very difficult decision to sell a farm that may have been in the family for decades.
One option that may help, particularly where land includes woodland of environmental or historic importance is a conditional exemption. This reaches beyond ancient woodland, however, for the purposes of this article, we will be concentrating on the woodland exemption.
For those farmers who have large woodlands on their land, it may be worth looking into this lesser-known but powerful tool.
What is conditional exemption?
Conditional exemption is a relief under the Inheritance Tax Act 1984 allowing owners of qualifying heritage assets to defer IHT and Capital Gains Tax (CGT), potentially forever, when those assets are transferred (e.g. on death or gifted).
Conditions for the exemption include:
- Keeping the woodland in good condition
- Allowing public access for a minimum of 28 days per year.
Importantly, this is not a tax write-off, it’s a deferral. If the conditions are breached, the deferred tax becomes immediately payable on the current value of the land.
Why ancient woodland matters
Among the categories of qualifying assets, land of outstanding scenic, historic or scientific interest is explicitly included, such as:
- Ancient woodland with rare flora and fauna
- Sites of botanical or ecological significance
- Areas hosting threatened or rare species.
If a farmer’s land includes such woodland, it may qualify for the conditional exemption even if the rest of the farm does not. This would, in effect, reduce the overall IHT exposure of the estate.
A timely opportunity for farmers
With APR set to be scaled back, many farmers will lose full relief on parts of their land, particularly where land is no longer used for traditional agricultural purposes. Conditional exemption offers a way to:
- Preserve woodland without selling or breaking up the farm
- Defer IHT and CGT, potentially indefinitely.
In some cases, it may also be possible to establish a Heritage Maintenance Fund. This is a special type of trust designed to help meet the ongoing costs of maintaining heritage property and can be structured to be exempt from IHT, provided various conditions are met.
How does woodland qualify?
To secure the conditional exemption, the woodland must be considered to be of outstanding scenic, historic or scientific interest.
HMRC, in consultation with the relevant advisory body, Natural England, will determine whether the woodland meets the conditions.
The application must be made within two years of death or transfer, and successful applicants are required to enter into a formal agreement with HMRC covering the maintenance and preservation of the heritage land.
Case study: unlocking the hidden value of woodland
Consider a family farm in Sussex with 40 acres of ancient oak woodland, home to rare orchids and dormice. The land is not actively farmed and would not qualify for APR under the new rules. However, following an ecological survey and endorsement by Natural England, the woodland is recognised as being of national ecological importance.
By applying for conditional exemption, the family is able to defer a potential £600,000 IHT liability. They avoid selling the land, and commit to maintaining the woodland and allowing limited public access. A Heritage Maintenance Fund is established to help cover conservation costs, supported by charitable grants.
Key points
- Compliance is key: failure to maintain the woodland or meet access requirements can trigger immediate tax liabilities.
- Restricted flexibility: selling or transferring the land (except to approved bodies) may revoke the exemption.
- Public access requirements: owners must allow access for at least 28 days per year, which may require infrastructure, insurance, and safety measures.
- Administrative burden: a Heritage Management Plan may be required, and ongoing reporting to HMRC is essential.
A strategic tool for conservation and succession planning
Conditional exemption is not just a tax planning strategy, it’s a way to align conservation with succession planning. For farmers with ancient woodland, it offers a rare opportunity to preserve biodiversity, retain family land, and defer significant tax liabilities.
With APR reform on the horizon, farmers should review their landholdings and consider whether parts of their estate, especially woodland, may qualify. With the right advice and ecological validation, conditional exemption could become a cornerstone of rural estate planning.
How TWM can help
Our specialist private client solicitors regularly advise farmers and landowners on IHT, succession planning and asset protection. If you would like personalised advice on how we can help you, please contact our Private Client team today.
