Planting and growing trees retains an appeal for many, and historically forestry has always been viewed as an opportunity where tax advantage is available while delivering other benefits over time – for example, timber, habitat, or amenity.
Moreover, ambitious targets to expand woodland cover in the UK from 13% to 19% in response to the climate change crisis and to meet net zero emissions by 2050 has spurred many with the capability to take action to do so, with a range of suitable grants and incentives available across the UK.
Despite these measures, uptake has been slow and woodland creation has been flat with just under 13,500 hectares planted annually. In England, tree planting rates fell in 2020-21 with just under 2,200 hectares of trees planted, down from 2,340 hectares the previous year. In Scotland, by contrast, 10,660 hectares were planted in the year to 31 March 2021. However, combined UK totals still fall well below the 30,000 hectares target that government has set for 2024-25.
With regard to woodland planting, HM Revenue & Customs (HMRC) certainly does not regard all such activity as being eligible where tax and benefits are concerned.
The most important test in determining whether a tax advantage can be gained from planting trees is in establishing that they are commercial – in other words, managed with a view to profit. Evidence of this can take a number of forms, for example: minutes of meetings, preparation of annual budgets, active management (such as the employment of a professional forester), a separate bank account, VAT registration and separate P&L in the annual accounts.
“It is important to show that any new woodland creation is to make profit at some point in its own right and not for other reasons, for example to enhance a shoot, to promote biodiversity, or to do more in the fight against climate change.”
The main areas where commercial woodland can offer a tax advantage are in relation to income tax, capital gains tax (CGT) and inheritance tax (IHT).
With regard to income tax, if woodland passes the commercial test, then profits from the sale of timber are not liable to tax, but the converse is that no loss relief is allowable against other income. There are exceptions, such as Christmas trees which are usually grown as a crop and fall within the statutory definition of market gardening rather than commercial woodland so profits from this business remain taxable.
In terms of IHT, provided the commercial test has been passed, woodland should attract 100% relief via Business Property Relief (BPR) – although it should be noted that land switched out of agriculture will no longer qualify for Agricultural Property Relief (APR) unless it is ancillary to farmland and the shelter belt criteria are met.
In the event that neither BPR or APR apply then the Deferral Relief Scheme (Woodland Relief) may, meaning that IHT on the timber value is deferred until after the timber is either felled or sold.
A sale of land and the crop together attracts CGT on the solum or land element only, often a low element of the whole. Succession planning measures such as gifts of commercial woodland attract CGT holdover relief and are IHT free based on the BPR.
Certain carbon offset payments are also capable of being regarded as part of the occupation of the woodland and income tax free.
Jenny Healy adds:
“Woodland, where there is evidence to prove that it is commercial, continues to remain attractive both in terms of tax advantages and available grant funding. The respective governments in England, Scotland and Wales are committed to protecting existing woodland, vigorously promoting new planting and working with landowners, farmers and others to increase the amount of it actively managed in the UK. The current tax regime supports those objectives and encourages their delivery but, as always, it is a complex area and professional advice should be sought.”