Investors can benefit from a range of grants and tax incentives designed to encourage private ownership of woodlands in the UK.
Professional forest management, combined with careful tax planning, can lead to reliable and competitive returns from a highly tax-efficient investment.
The principal forms of taxation affecting forestry are Income Tax, Capital Gains Tax (CGT) and Inheritance Tax (IHT).
The income and profits from timber sales in woodlands managed commercially are free from both Income and Corporation Tax.
Capital gains tax (CGT)
The gain in value of standing timber, whether from the physical growth of the trees or rises in timber prices is entirely free from tax. The sale price or transfer value of the trees is also left out of Capital Gains Tax calculations. Only the increase in the value of land is assessed for CGT.
However, indexation and taper relief are available and capital expenditure on improvements such as new roads, fences or buildings used for business purposes can be offset against the land value.
Forestry can be particularly attractive for investors with a Capital Gains Tax liability following the sale of a business asset, as forestry land is eligible for 'rollover relief'. Investment in young commercial woodland, or the planting of a new one is, therefore, an excellent route to building up an asset free of immediate capital taxes.
The entire value of commercial woodland, including both the land and the trees, attracts Business Property Relief, currently at 100%, once it has been owned for two years. Provided this condition is met, there is no Inheritance Tax liability.
Woodlands of outstanding scenic, historic, or scientific interest may qualify for Heritage Relief, allowing a conditional exemption from Inheritance Tax.
Value Added Tax (VAT)
Woodland owners can register for VAT and reclaim the tax on expenditure.
‘Managed Commercially’ – what does it mean?
Woodlands in the UK can be eligible for certain exemptions from inheritance tax if they meet a number of criteria, principle amongst which is that they should be ‘commercially managed’.
Whilst this is not formally defined, in our experience an investor should be able to evidence some or all of the following to demonstrate commercial management:
- Crops capable (type, condition, age, arrangement) of being commercially managed.
- Active woodland management, preferably by a qualified forester.
- A Management Plan and Cash Flow in place and in use.
- Engagement with the Forestry Commission’s grant schemes.
- Crop insurance in place.
- VAT registration, if necessary.
- Evidence of commercial trading, where possible. This might just be timber sales. Non timber activity such as sporting is probably not sufficient.
For further information, please read our Tax Guide 2016: Tax Guide April 2016
Tilhill Forestry forest managers are not qualified to give taxation advice. To ensure your woodland investments are tax-efficient and planned to suit your individual requirements, we strongly advise all clients to consult their own professional financial or tax advisers.