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Taxation Matters: What is the tax position of commercial forestry?

Aug 25, 2022

UK taxpayers investing in commercial forests and woodlands in the UK can benefit from a series of tax incentives which can enhance underlying returns from timber and add to the appeal of forestry investment.

Professional forest management and 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 and Corporation Tax, Capital Gains Tax (CGT) and Inheritance Tax (IHT).

Income tax and Corporation Tax

The income and profits from timber sales in woodlands managed commercially are exempt from income tax and corporation tax. This means that no tax is payable on any income generated from timber harvested from commercial forests.

Any income generated from the property, for example, rents received from letting a woodland for leisure activities such as camping, are liable to income tax.

No relief from income tax is given for expenditure incurred in commercial woodlands.

Capital Gains Tax (CGT)

The increase in value of standing timber, whether from the physical growth of the trees or rises in timber value, is entirely free from CGT. The trees’ sale price or transfer value is also left out of Capital Gains Tax calculations. However, the underlying land remains assessable. 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.

It is crucial to demonstrate that the property has been managed as a commercial investment to qualify for this CGT relief and to take professional advice on apportioning the value between the forestry and the underlying land.

Roll-Over Relief

Where a chargeable gain has arisen on the sale of a qualifying business asset, it is possible to benefit from roll-over relief from any CGT due by investing the sale proceeds into commercial forestry. This must be done in the 12 months before and three years after the sale.

It is worth noting that on the sale of land, any gain in the value of this land from the date it was acquired will be subject to CGT.

Holdover Relief

Holdover relief on gifts of business assets is also available for land containing commercial woodland – CGT is deferred until the donee sells the gifted assets.

Inheritance tax

The entire value of commercial woodland, including 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, historical, 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 there is currently no official definition of “commercial woodlands”. They are best described as woodlands which are “managed on a commercial basis with a view to the realisation of profits.” There should be evident intent to make profits – income or capital – and the usual attributes of a commercial business such as professional management, separate bank account, VAT registration, accounts, etc.

The information contained in this article is intended as a general overview of UK tax laws. It should be used only as a guide and does not constitute legal or tax advice