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 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.
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.
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