Whether growing trees as a commercial crop or increasingly for carbon offsetting, forestry and woodland retains its appeal for many. Its case is strengthened since historically forestry has always been viewed as an opportunity where it is possible to gain some tax advantage while delivering other benefits over time – timber, habitat, amenity, or woodland carbon for offsetting.
The most important test still 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 the woodland investment stands to make profit in its own right and not to enhance a shoot for example or just to promote biodiversity.”
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 it are not liable to tax. It should be noted that the flipside is that losses incurred are not 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.
Regarding CGT, provided the woodland trade is commercial the timber value is not liable to CGT on a sale with only the ‘prairie’ value of the land, ie land in its natural unimproved state, being liable to tax.
Commercial woodland is also a qualifying asset for Rollover Relief purposes.
In terms of IHT, provided again that the woodland is undertaken commercially then, on an IHT event, business property relief (BPR) may be available. Alternatively, APR may be available if it is situated with agricultural land that is ancillary to farmland. In the event that neither of these reliefs 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.
David further comments:
“Woodland, where there is evidence to prove that it is commercial, remains doubly attractive both in terms of tax advantages and available grant funding and the respective government’s in England, Scotland and Wales are committed to protecting woodland and working with landowners and others to increase the amount of it actively managed in the UK. The current tax regime both supports those objectives and encourages their delivery. As ever, professional advice should be sought.”