Stephen Poole

Where are we with woodlands – are they still a good tax planning vehicle? I seek to tease out some answers below
What is woodland?
Growing trees on land is a very ancient activity, and there are many reasons to do so. Nowadays woods can be held for various activities which might be for felling to provide timber or heating, it might be grown as a habitat for hunting-based activities, it may be part of a woodland burial trade, it may be grown as part of a countryside stewardship activity with mainly ecological motives, and it may be part of a rewilding scheme where payments are received for public goods.
Certain activities are deemed by the legislation to be trades if they would not otherwise be so. Farming is one such occupation and it is worth pondering a moment on section 996 of the Income Tax Act 2007, because the wording with this old piece of legislation has defined the way farming has been taxed for generations.
Here we see that farming is the occupation of land for the purposes of ‘husbandry’. This is taken to not include forestry activities or market gardening but it does include hop growing, some horse based activities (which I will look at elsewhere), and short rotation coppicing. A “short rotation coppice” is defined as “a perennial crop of tree species planted at high density, the stems of which are harvested above ground level at intervals of less than 10 years“.
In addition section 11 of the Income Tax (Trading and Other Income Act) 2005 exempts the commercial occupation of UK woodlands from income tax, so profits or losses arising from such occupation are therefore ignored for income tax purposes. Incidentally this is does not spring from altruistic motives on the part of government, but by the particular problems of accounting for tree growing. If this were to be taxable HMRC would be given tax reliefs up front and waiting a long time for their share of the profits…
Before I go into detail I think it helpful to tabulate the income tax, capital gains tax and VAT position as regards some activities on land.
Income tax | Capital gains tax | VAT | Inheritance tax | |
---|---|---|---|---|
Farmland used for growing crops | Trade | Land subject to CGT but rollover relief and other trade reliefs may be in point | Land exempt unless opted. Sales of crops taxable subject to zero rating for food | Agricultural Relief on agricultural value if for human consumption, also potentially Business Relief on full value |
Short rotation copping | Trade included with all other farming | Land taxable, crops outside scope | Sales of wood standard rated -see note 1 | Business relief if trading |
Commercial woodland | Exempt from income tax | Trees exempt but land taxable. | As above | Business relief if trading |
Other woodland | Potential taxable if there is a trade | Land taxable | Trees taxable if there is a business – see note 1 | Business relief may be possible if within and environmental scheme |
Income tax
In general the sale of timber from woodland will be exempt from income tax to some extent. Either the woodland is managed commercially in which case the exemption would apply or if it’s not managed commercially then there may not be a business in the nature of trade in which case the trees will not be subject to income tax. For the income tax exemption this will apply to operations on the tree until it is felt and lying on the ground “in the round”.
Operations on the wood after felling are potentially taxable. For example if the wood is then going to be chipped to be used in heat generation they will need to be a value transfer into the chipping trade. The chipping activity and become the taxable activity.
If the woodlands are not commercially managed then whether or not the sale of trees will be taxable will be dependent upon whether there is a trading type activity carrying on. If there is then there was a potential income tax charge on the sale of trees and note in particular that short rotation compassing is treated as trading within the farming definition. There may also be a charge for capital gains tax see below.
Investment into EIS, SEIS and VCT is generally not available, not surprisingly perhaps.
Capital gains tax
If a woodland is not managed commercially and not within the income tax and capital gains tax exemption then is a question as to whether the sale of a tree is subject to capital gains tax, But trees would be each treated as a single chattel and not a set and therefore subject to a couple of gains tax exemption each of £6000. It is therefore unlikely that a single tree would be subject to capital gains tax. In the case of the sale of a woodland which was not commercially managed the value of the wood in the woodland would be part of the proceeds for capital gains tax. Clearly there are many complications here and advice will need to be taken in each case. HMRC provide a good summary here.
Rollover relief can be available on a purchase or sale of Woodlands but only to the extent of the underlying land if the land is managed commercially. The proportion of the total price represented by the land will depend upon the age of the trees but in any cases it is it will be significant.The same applies to other business capital gains tax reliefs such as holdover relief and entrepreneurs relief. Specific advice needs to be taken in these areas.
Rollover relief is a relief from capital gains tax whereby if a capital gain is made and within the four year window starting one year before and ending three years after that disposal the proceeds on sale are reinvested into another trading asset, the capital gain on the disposal might be rolled into the base cost of the new asset leading to a much reduced capital gains tax bill but at the price of a potential future bill. I do not intend to go into the complexities of this here but happy to give advice if necessary.
VAT
Sales of Woodlands will be treated as taxable for VAT purposes if there is a business activity. In many cases this will be based upon how things look on the ground and in most cases where trees are felled and sold on a relatively commercial basis VAT should be assumed to be in point. It will therefore be necessary to check whether the registration threshold has been exceeded. The lower rate of 5% can be available on the sale of wood if the wood is going to be used for heating. Specific advice taken.
Inheritance tax
If your client owns woodland, an election may be made to leave out the value of the timber from the value of the estate (but the value of the land will be included). This is not a forever gain as the tax or come back into point Adam when trees are sold. Detailed records will therefore need to be kept.
Subject to the above election it will often be more important to consider where the business relief will be available on the value of the Woodlands on death. This would include the full value of the land and the growing trees to potentially fully exempt the woodland.
Other thoughts
A few other thoughts (by no means to be taken as exhaustive) not to be forgotten but each of which will require specific attention.
For people with SIPPS, a particular advantage of Woodlands is that they are treated as commercial land for the purposes of investment into pensions. Specific advice would need to be taken on this.
Carbon trading within the woodland carbon code may be available giving rise to potential upfront payments on planting of trees.
Countryside stewardship capital grants and maintenance payments may be available for planting of woodland. This will be continuing until 2024.