Can’t see the wood for the trees? Effective tax planning for woodland owners

Woodland is increasingly being seen as a good investment opportunity but can often be overlooked by landowners and farm enterprises as part of their wider estates. Although the tax rules around woodlands are complex and also dependent on how the woodland is used, there are a variety of ways in which woodland owners can potentially claim tax relief, especially in terms of Inheritance Tax (IHT) and Capital Gains Tax (CGT).

In addition, there are a number of grants that can be taken advantage of where appropriate. It is worth noting that in recent years, HMRC has been increasingly scrutinising woodlands so it is vital to take expert legal and tax advice.

Commercial woodland 

As the name suggests, woodlands are seen as commercial if they are being managed with a view to making a profit, whether that is from selling timber or running a leisure business such as paint balling. A commercial woodland can bring with it a number of tax advantages, but taking advantage of these can be complex with a multitude of elements to consider.

Even demonstrating that a woodland is commercial needs to be handled carefully. For example, due to the long-term nature of the sustainable production of raw timber, it may be decades before profit can be established, especially in the case of new planting.

Indeed, any commercial woodland, whether it is used for selling timber, shooting, leisure businesses such as paintballing or even fishing, needs to be able to provide comprehensive evidence of its commerciality. As such, a comprehensive business plan is recommended.

Aside from tax planning, there are also a variety of grants that can be explored, such as the Woodland Carbon Fund and the Woodland Management Plan Grant.

CGT implications

The issue of CGT when it comes to commercial woodlands depends on a variety of factors, including whether it is just the trees, the woodland itself or indeed an entire farming estate of which the woodland is part that is being sold. If merely selling trees, then the proceeds will not normally be liable to CGT. As such, where the whole woodland is being sold, CGT will likely be liable on the land, but not the trees. Taking expert advice to correctly apportion values between the non-taxable trees and the taxable land is vital here.

If the underlying business is sold at the same time as the land, then Business Asset Disposal Relief (previously called Entrepreneurs Relief) might apply which restricts the CGT tax rate to 10% on the first £1 million of sale proceeds. The figure of £1 million is a lifetime allowance which means that is the seller has already used the relief on a previous sale, the £1 million band would not be available on a later disposal.

IHT implications 

Commercial woodland should also qualify for IHT relief, but again, this is not always straightforward. Woodland that is occupied commercially and with a view to making (or already demonstrating) a profit should qualify under the BR code, so long as the wood in question has been owned for two years. This does not just have to be from selling timber but can also include profitable recreational activities such as paintballing or potentially even camping, providing certain conditions are met. With camping in particular, while it may be possible to claim BR, any claim would need to demonstrate lots of additional services to be successful, such as providing a café and/or a shop.

Relief can be for 100% of any IHT due, but this depends on how the ownership of the enterprise is structured. For sole traders it is straightforward, but for partnerships it can be more complicated.

However, woodlands may also qualify for AR. The key criteria for this is that they are ancillary to agricultural land and used for, for example game coverts, shelter belts, coppices grown to provide fencing material for the farm or clumps of amenity trees. It is important therefore that specific nature of and activity on any woodland is accurately recorded.

‘Short rotation coppice’ woodlands, which are harvested after no more than ten years are also considered farming rather than a commercial business and as such will qualify for AR.

It is also wise to look at the overall requirements of the estate when looking at which IHT relief to claim on woodlands. AR should take precedence if it can apply over BR. But often where there is quite a mixture of activities the business needs to be looked at very carefully to see if AR or BR should be claimed on woodland.

Non-commercial woodland

Woodlands that are only used for recreational purposes by the landowner will not benefit from any tax relief. However if the owner can show the woodland is used for both commercial and private purposes or that it forms part of a larger farming or landed estate, then certain relief may apply when it is sold, as long as other conditions are met.

Non-commercial woodland may also qualify for a special kind of inheritance tax relief, called Woodland Relief, on the death of the owner. This defers the IHT on the value of the trees only, (not the land) until they are sold (which could be years away) or given away. Additionally, if they are given to the new owner’s spouse or if the new owner dies still in ownership of the trees, then there is no charge.

In order to qualify for Woodlands Relief, at the time of death the owner must have owned the woodland for at least five years. However if the woodland has been gifted to or inherited by the owner then there is no minimum ownership period.

However, AR and BR are both seen as preferable to attempting to claim Woodland Relief and so eligibility for those types of relief should be explored first.

Final thoughts 

Woodlands – either as stand-alone investments or as part of a wider estate – can have great commercial potential, as well as benefit from significant tax relief. However, this is a hugely complex area and careful tax and estate planning is required. It is particularly important to understand and consider how any woodland is used and whether, especially in cases where woodland forms part of a larger estate, it can be utilised differently in order to maximise its potential.