Russell de Beer BA (Hons) MSc (Hons) FRICS
Director, Rural
As woodland activities on estates and farms become more diverse, Russell de Beer of Strutt & Parker’s Land Management Department looks at the tax implications and tax reliefs for landowners who have commercial occupied woodland.
As woodland activities on estates and farms become more diverse, Russell de Beer of Strutt & Parker’s Land Management Department looks at the tax implications and tax reliefs for landowners who have commercial occupied woodland.
What is commercial occupation?
The importance behind knowing whether you have commercially occupied woodland or not relates to tax as the commercial occupation of woodland with a view to profit is actually exempt from both income tax and corporation tax.
Defining what classes as ‘commercially occupied’ is a little more complicated and comes with a number of limitations and exceptions. But what is important is that HMRC does acknowledge the long-term nature of forestry, so has said that it is not necessary to show profits immediately to demonstrate that a forestry business is run on a commercial basis.
However, it is always advisable to keep a woodland management plan showing how and when income is expected just in case HMRC enquires. Also, it is worth noting that no relief is available for losses suffered regarding commercial woodlands, and capital allowances cannot be claimed on spending on plant and machinery connected with commercial woodlands.
Limitation on exemptions
There are limitations to the exemption and it cannot be assumed that all commercial activities on woodlands are exempt from income tax or from corporation tax.
Examples of limitation:
- If land is predominantly occupied for farming. Receipts from felled timber from trees planted on farms are not covered by the exemption and will be taxed as farm income.
- Income from short rotation coppice like willow and poplar is classed by HMRC as income from farming rather than commercial woodlands.
- The same applies to any profit generated from growing Christmas trees. However, Christmas trees produced by selling the tops of felled trees from commercial woodlands or thinnings from land being prepared for forestry would be covered by the exemption.
Processing timber
The tax rules in regard processing timber can be more complex. Activities around the normal preparation for marketing timber, up to the point of sawing into plants, are covered by the exemption - as are sales of processed timber and any expenses from felling and preparing timber.
The owner of commercial woodland who lets it for a rent, however, will pay tax on the profits as if it was a property business. Likewise, a woodland owner who undertakes contract work for others will also be taxed on the income generated.
Various tax relief schemes
There are a number of tax relief schemes that are worth checking out:
- Business Property Relief (BPR) – Once commercial woodland has been owned and occupied by the owner for two years it qualifies for 100% BPR. This meaning no inheritance tax will be payable on the owner’s death. In order to qualify, the woodlands must be managed as a business, which could include shooting rights, ponds for fishing, log cabins for holidays and the sale of woodchips and firewood.
- Agricultural Property Relief (APR) – To qualify for this, the woodland must either be classed as agricultural property or be ancillary to agricultural property. Where the new planting has been the subject of a grant to take land out of agricultural use for many years, it cannot qualify as agricultural property as it is no longer being used for this purpose. However, shelter belts, game coverts and woodland grown for fencing materials can qualify as agricultural because it is ancillary to farmland.
- Inheritance Tax (IHT) – Woodlands Relief – This provides a ‘deferral relief’ so that a charge does not arise until the timber is sold in the future. It is therefore a deferral rather than an exemption from IHT and consequently less valuable than BPR and APR.
- Heritage Relief – Woodland may qualify for IHT exemption where it is considered to be land of outstanding scenic, historic or scientific interest. In order to qualify, the new owner must agree to maintain the woodlands and grant public access.
- Capital Gains Tax (CGT) – The sale of timber or standing timber from commercial woodlands is exempt from CGT. The sale of the land itself, however, does not benefit from relief.
VAT
The VAT position depends on the owner’s VAT status, not just transactions connected to the woodland. However, you may need to consider:
- The sale of timber is standard rate for VAT purposes, as is the grant of the right to fell and remove timber. The sale of Christmas trees is also at the standard rate.
- The sale of woodland may be either exempt or standard rate depending on whether the owner has exercised an option to tax in respect of the land.
- Standard rate VAT is chargeable for fuel wood supplied to a wholesaler. A lower rate of 5% is chargeable if wood fuel is sold to the general public for domestic use.
- Contracting services provided to other woodland owners will be standard rate, provided the contractor is already VAT registered.