Woodland and Tax

Please note: this arti­cle is an out­line guide to the cur­rent leg­is­la­tion in Eng­land and Wales and can­not be taken as “advice” under any cir­cum­stances. Please con­tact your accoun­tant or solic­i­tor to dis­cuss your own situation.

Most of the fol­low­ing infor­ma­tion refers to what HMRC refer to as “com­mer­cial wood­lands”. These are any woods for which “com­mer­cial” activ­i­ties take place. Tim­ber is sold, over­heads are incurred. HMRC does not set a lower limit on these activ­i­ties but to take advan­tage of the var­i­ous tax allowances, it is essen­tial that the wood­land owner can demon­strate proper account­ing pro­ce­dures. You should keep spe­cific wood­land accounts (not mud­dled within farm or other busi­ness accounts). A wood­land bank account would help, and of course keep all the sale and income receipts. With­out these HMRC will assume that your wood­land is not com­mer­cial and not eli­gi­ble for tax ben­e­fits. Wood­lands do not always have to make a “profit”. It often takes many years of invest­ment before valu­able tim­ber can be produced.

In the case of very small wood­land areas HMRC may take the view that your trad­ing activ­i­ties are “insignif­i­cant”, so you may have to make a case to argue your point. Poor paper­work will not help.

Income Tax

Income gen­er­ated from the own­er­ship of “com­mer­cial wood­lands” is exempt from both income tax and cor­po­ra­tion tax. You do not pay tax on the income from your woods.This would include income from wood­land grant aid. This is of con­sid­er­able ben­e­fit to many own­ers, but you can’t have your cake and eat it. HMRC does not give any tax relief on wood­land expen­di­ture of any kind or on inter­est pay­ments on wood­land mort­gages or equip­ment loans. You can­not reclaim any expenses relat­ing to your woods.

Inher­i­tance Tax

If you sell tim­ber on a reg­u­lar basis from your wood (with good records), when you die you will qual­ify for 100% busi­ness prop­erty relief (BPR)as long as you have owned the wood for at least two years. Your estate will not have to pay any inher­i­tance tax on the value of the land and trees. Nei­ther will there be any Cap­i­tal Gains Tax lia­bil­ity on the wood or your timber.

If you die before you have owned the wood­land for two years, your estate will be able to pay off the Inher­i­tance Tax in annual pay­ments over a ten year period. These will also be inter­est free

Gifts and Life­time Transfers

In view of the inher­i­tance tax exemp­tion, there is less imper­a­tive to pass wood­land to other mem­bers of the fam­ily dur­ing one’s life­time. If you do, the recip­i­ent will need to have owned the wood­land for seven years to be 100% exempt from Inher­i­tance tax. If they sell the wood­land dur­ing that period they will have to re-invest the money in a sim­i­larly exempt busi­ness, or they will be liable for some or all of the IHT.

Cap­i­tal Gains Tax

At its cur­rent rate of  28%, Cap­i­tal Gains Tax is a pretty hefty tax. The increase in the value of tim­ber and plan­ta­tions is exempt from Cap­i­tal Gains Tax (CGT). This does not apply to the value of the land which will be taxed from the date at which it was bought. If the cap­i­tal value of the land increases and you sell the wood­land, you will have to pay Cap­i­tal Gains Tax.  The land and the tim­ber will be val­ued sep­a­rately. Most of the woods that we sell have fairly mod­est tim­ber val­ues, so CGT may be some­thing you need you con­sider if you decide to sell on your wood.

If you qual­ify for so called “entre­pre­neurs’ relief”you may be able to reduce the Cap­i­tal Gains Tax lia­bil­ity down to 10% when you sell the woodland.

Roll-Over Relief

If you have a Cap­i­tal Gains Tax lia­bil­ity aris­ing from the sale of other busi­ness assets, you may be able to defer this lia­bil­ity by “rolling it over” to another asset such as wood­land. If you then keep the wood­land until you die, your estate will be assessed just for Inher­i­tance Tax and the Cap­i­tal Gains Tax lia­bil­ity will dis­ap­pear. Impor­tantly, it is only the land ele­ment of the invest­ment which can qual­ify for roll-over – not the tim­ber value.

(See Inher­i­tance Tax above.) Remem­ber you can keep the wood for two years, gift it to a mem­ber of the fam­ily and in 7 years there will be no lia­bil­ity for Inher­i­tance Tax or Cap­i­tal Gains Tax.

Non Com­mer­cial Woodlands

If your wood is man­aged prin­ci­pally for nature con­ser­va­tion or amenity you will not qual­ify for the above ben­e­fits. The woods will be treated like any of your other assets. You will be liable for income tax on any tim­ber sales, and you will need to declare any income from grant aid. If the wood­land is part of a farm or estate you may be able to set your input costs and over­heads against your tax­able income.

You will need to make the deci­sion as to which best suits your needs. Some seri­ous long term plan­ning is required.

Wildlife Wood­lands Ltd 2012

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