The government has laid out is proposals to make the UK carbon neutral by 2050. As part of this, millions more trees will need to be planted to offset carbon emissions. For many investors, commercial woodlands are becoming more attractive by the day due to the potential future subsidies that will be offered for planting on bare land. The concept around forestry investment is not new but attracts significant investor interest because of its favourable tax advantages. Yet, the woodland activity on a farming enterprise is often overlooked. It is therefore important to understand the complex tax issues.
Income tax
Currently for UK taxpayers any income generated from commercially managed woodland is free of income tax and corporation tax. This means in effect:
- the sale of timber is not a trade and is not subject to income tax and corporation tax;
- relief is not available for losses suffered i.e. the cost of harvesting the woodland is not allowable nor is any losses against other sources of income;
- capital allowances cannot be claimed on capital expenditure incurred on plant or machinery connected with commercial woodlands;
- no relief is available for expenditure incurred on the preliminary clearance of woodland or other preparation of land for forestry purposes.
The owner of a commercial woodland who lets it in return for a rent is, however, chargeable on the profits arising from a property business.
Capital Gains Tax
Where a woodland is managed by the occupier on a commercial basis any increases in the value of the timber are free of capital gains tax (CGT). This exemption applies whether the trees are standing or have been felled.
However, this does not apply to any increase in the value of the land itself, this is subject to CGT at the point of sale in the normal manner.
Woodlands may have more than one use, for example a paintball centre, where the amenity business uses the commercial woodland for its activities. If this is the case, it will be necessary to value the commercial timber business separately from the amenity business.
Woodlands may be felled and sold by the owner, or the owner may sell the right to enter and fell the trees to another person. If the trees are growing on a commercial woodland, the CGT exemption will apply. If the trees are not growing on a commercial woodland, the CGT consequences depend on the precise nature of the right which is granted.
Inheritance tax
Woodland can benefit from agricultural property relief (APR) if they are ancillary to farmland, such as shelter belts or where firewood and fencing are taken. This will qualify for 100% relief from inheritance tax, which includes both the value of the trees and the land.
If woodlands are managed on a commercial basis for greater than two years, they can benefit form 100% business property relief (BPR). Again, reducing the death estate.
Careful tax planning is needed here depending on the requirement of the estate to claim APR or BPR.
Other tax issues
Commercially run woodlands are regarded as a commercial property suitable for investment into a Self-Invested Personal Pension (SIPP). With tax relief being obtained on the initial contribution and any subsequent increase in the value of the property being free from CGT. However, care must be taken as there can be no personal benefit or enjoyment from the asset.
A sale of land with standing timber is exempt from VAT. However, the sale of timber itself is standard rated. A grant of a right to fell and remove timber is also standard rated as well as the sale of Christmas trees
There are many tax issues to consider when buying woodlands or running woodlands. The time to plan is now to ensure that tax planning can be maximised.
For further information please contact Angela Wych at [email protected]
