Woodlands

Stephen Poole

Photo by John-Mark Strange on Unsplash

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 taxCapital gains taxVATInheritance tax
Farmland used for growing cropsTradeLand subject to CGT but rollover relief and other trade reliefs may be in pointLand exempt unless opted. Sales of crops taxable subject to zero rating for foodAgricultural Relief on agricultural value if for human consumption, also potentially Business Relief on full value
Short rotation coppingTrade included with all other farmingLand taxable, crops outside scopeSales of wood standard rated -see note 1Business relief if trading
Commercial woodlandExempt from income taxTrees exempt but land taxable.
As aboveBusiness relief if trading
Other woodlandPotential taxable if there is a tradeLand taxableTrees taxable if there is a business – see note 1Business relief may be possible if within and environmental scheme
1) sales of wood subject to reduced rate of 5% if for heating

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.

References

HMRC guide to CGT on trees

Woodland Carbon Code

The future of farming and green recovery

Stephen Poole

Photo by Sam Carter on Unsplash

This is a personal view that I have put together partly in response to being told by farmers that they plan 2 years ahead in their plans, but accountants work one year in arrears.

Also, in my view, we have a once in a lifetime opportunity to make a real difference and it is important to understand how to make use of all the tools and incentives available. With that in mind, I am going to try to pull together the various forces acting at the moment, and keep an up to date summary here of policy and taxation measures relating to agriculture.

I have a special interest in rewilding so I have some comments on this at the end.

Natural capital accounting

As part of understanding the way we live within, make use of and return parts of the natural world, it can be useful to account for the natural capital as part of accounts.

Valuation of the natural environment in business plans takes account of

  • what have the business got
  • what can it do
  • what is it worth

I recommend the guide produced by EFTEC which has an example balance sheet in Annex 3. At the moment the exact figures for the various component parts are not always easy to come by, but they are starting to be tabulated, and I will update this page with full details when available.

There is a distinction between private and public consumption and the hope is that public natural capital increases can be monetised, and potentially private flows also. As a general rule we think

  • private amounts to the extent that the assets are protected
  • public if available to public as a whole

Monetising natural capital flows

This a summary of the main current ways to monetise activities:

  1. through the future ELMS payment system which has a phased introduction to take over from basic payments. Update in process
  2. carbon offsetting with the Woodland Carbon Code, a voluntary standard. This gives a standard value on stored carbon in tree and landowners planting trees can potentially benefit from selling Carbon upfront payments of between £5 and £15 / tCO2. Woodland carbon guarantee scheme auctions every 6 months
  3. biodiversity net gain offsetting under the environment bill. This will inform future planning to increase biodiversity, and farmers may benefit from offsetting payments from local development (see below)
  4. water companies make payments to farmers who put in place flood control and water qualify improvement schemes
  5. green prescribing – the mental health value of being outside – a source of income for businesses with outside spaces, with the impact being a pure good
  6. Countryside stewardship payments with good examples of payments for creation of woodland giving, for example, capital grants of up to £6,800 per hectare and annual maintenance of around £200 per hectare

As a general guide, my experience is that the cost of baseline valuation will fall between about £1000 for a very simple situation to £10000 for a complex estate.

Countryside Stewardship payments

Countryside Stewardship agreements will continue for 2021, 2022 and 2023, but will then be replaced with the new Environmental Land
Management Scheme (ELMS). This will follow trialling and testing and a national pilot involving farmers and land managers. Under current plans, the full ELMS system will be in place from 2024. However it is expected that this timescale may slip.

Net gain

At the Spring Statement 2019 the government mandated that net gain would be mandated in the Environment Bill and is contained at section 90 et seq which propose a new Schedule 7A to the Town and Country Planning Act 1990. The Bill was introduced in January 2020 and is currently in committee stage and scheduled to report on 25 June 2020. In essence the Bill requires a 10% increase in biodiversity included credits obtained.

I am not going to provide a full overview of the Environment Bill here, but will comment on parts of it as it passes through the house. It contains far more than is mentioned here and requires separate study, in due course

Tax reliefs

A brief overview of tax reliefs.

Income

Averaging of profit under both 2 year and 5 year schemes

Capital

Capital allowances on investment up to a current limit of £1m

Entrepreneur Relief on sale of active farmland to give a 10% rate of capital gains tax

Inheritance Tax

Agricultural relief on land used for agricultural purposes, which is largely centred around being used for the production of human consumable food and other products

Business Relief where the land is mainly not held as an investment asset, applies where an active trading activity is carried out. This is more complex and will be covered in a separate article.

Woodland

Commercially managed woodland is exempt from income tax and capital gains tax. In addition there is an IHT relief which defers IHT payments on growing trees. This will be covered in a separate article.

Rewilding

Rewilding can be seen as a use of land to increase the biodiversity. The above schemes can be used together and note that payments can usually be claimed for the same asset if this has more than one beneficial aspect.

At the moment about 0.3% of land area in the UK is rewilded and even ambitious plans tend to only envisage this increasing to about 5%. However this rewilded area could have an impact much larger than its area suggests.

In general it is probably not going to be worthwhile to attempt to rewild small areas, and an arbitrary lower limit could be set at 1,000 acres if large mammals are part of any rewilding plan. However, working with neighbours will allow areas of land to be connected up across landscapes. For this reason, a large part of a rewilding initiative will be connecting up land areas so action across areas involving multiple land owners is envisaged.

From a tax point of view, wild land can fall within the tax reliefs, for example where land is managed under a land management program agreed with Government under ELMS or a similar scheme payments under that scheme can potentially be seen as a payment for the service of providing the ecosystem service that the payment is based around.

As far as woodland is concerned, if these are managed under an agreed scheme it might be argued that this is commercial so should fall within reliefs. This will be covered separately.

References

Farming for the future policy update February 2020

Natural capital accounts – final reports

Woodland carbon code

Bi0diversity net gain

Countryside Stewardship

Ecosystems Knowledge Network

Natural capital committee