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Woodland tax relief – From little acorns…
For most, woodlands might not be the first thing that leaps to mind when one thinks of potential investments.
But over the last 10-15 years, those who have invested in woodlands have, in many cases, seen strong returns. It is fair to say that people decide to invest in trees for a multitude of reasons. These might include some of the following:
• In order to produce timber on a commercial basis (commercial woodland);
• For leisure and sporting purposes (from traditional shooting parties to paintballing events!)
• Environmental / conservation purposes
• Aesthetic reasons
In this article, we will mainly concentrate on commercial woodlands. Why? Well, this is generally where any tax advantages may be found.
Of course, a commercial woodland may also include other activities.
I will also discuss these where they appear relevant.
What are commercial woodlands?
A woodland is considered to be ‘commercial’ for tax purposes where the trees are grown for the purpose of selling them as timber.
Purchase of woodland
Where an investor directly acquires an area of woodland then he or she should expect to pay Stamp Duty Land Tax (“SDLT”) on the purchase. This will, of course, be subject to non residential rates of tax (a loophole for squirrels – who clearly might use it as a dwelling?). Where the consideration exceeds £150,000 then duty will be payable at a rate of between 2-5%.
Sales of timber
It is worth noting that the commercial occupation of woodlands is not classed as a trade.
This is noteworthy as it means that the profits of such a woodland are not subject to income tax and, similarly, cannot relief on any losses.
Further, the timber sales will also be outside the scope of Capital Gains Tax (“CGT”).
Any sales of timber will be standard-rated for VAT purposes and the grant of a right to fell
and remove timber is also standard rated.
Sale of the woodland
The tax position, and specifically the CGT position, on the sale of a woodland can be quite complex.
The sale of timber or standing timber from a commercial woodland is exempt from CGT. The sale of the land itself, however, does not benefit from any such relief.
As referred to above, it is often the case that there will have been some commercial activity in the woodland. For example it might be paintballing venue at the weekend or used as a forest school during the week.
Where such activities are present in the woodland then tax reliefs may be available. It is quite possible that any gain might qualify for, say, Entrepreneurs’ Relief or Holdover Relief where the business and the woodland are sold as one entity.
If there is a sale of the land with standing timber then, for VAT purposes, this is an exempt supply.
Inheritance tax (“IHT”)
There are a number of potential IHT reliefs that might be in point. However, assessing which, if any apply, is not always straightforward.
If the woodlands have been owned for a two-year period then they might benefit from 100% Business Property Relief (“BPR”).
In order to qualify, the woodlands must be managed as a business. Common examples of where a woodland might be managed as a business would be where the woods are exploited for shooting rights, they include ponds available for fishing, site log cabins for holidays and where the trees are used for firewood.
In addition, land which is occupied by commercial woodlands may qualify for Agricultural Property Relief (“APR”) where the woodlands are deemed to be ‘agricultural’. This may be the case where they are ancillary to farmland. A woodland might be ‘ancillary’ to farming where the trees are used as shelterbelts, as cover for pheasants, or as ‘amenity’ woodlands. Commercial forestry is not agriculture but, as described above, might qualify for BPR.
There is also a special, dedicated IHT relief for woodlands. As such, this can be helpful where neither APR nor BPR is available. To obtain ‘Woodlands Relief’, you must have owned the land concerned for at least five years before death if the land was purchased by the relevant person. This time restriction does not apply where the woodland was acquired by other means such as a gift.
Finally, in this rollercoaster of IHT reliefs, there is potentially an opportunity in some cases to claims ‘Heritage Relief’ This relief will only be available where the woodland is considered to be land of outstanding scenic, historic or scientific interest. In order to obtain the relief, the new owner must grant access to the public
Holding woodlands through a pension scheme
One other feature of a commercial woodlands is that it would be regarded as commercial property. This means that it would be generally suitable (merely from a tax perspective – I make no call from an investment advisory perspective here!) for holding in a registered pension scheme. This means one could hold in one’s SSAS or SIPP.
The above is intended as a brief ‘walk through the woods’ on commercial woodlands. For what appears to be a basic and natural asset, the tax position is far from complex. Woodlands might be of interest to those seeking an investment with added (tax) benefits. However, and say it quietly, tax isn’t the most important thing in the world. One should focus on whether the investment meets your personal or commercial needs. Will it provide you with the return you want? Clearly, any tax reliefs available may have a material asset on the net investment return.
But don’t let the tail wag the dog or lose the wood for the trees.
If you are considering an investment in commercial woodlands, or have any queries about the above article, then please do not hesitate to get in touch.