Contributors
Woodlands are a popular topic at the moment, often with a focus on grants, carbon and biodiversity. One subject receiving less attention is the advantageous tax regime that applies to woodland, particularly commercial woodland. This article sets out the reliefs, explains the evidence that HMRC is likely to require and concludes by looking at how woodland can be used for tax planning purposes.
Inheritance Tax – Agricultural Property Relief
Woodland which is occupied with and which is "ancillary" to agricultural land or pasture qualifies for Agricultural Property Relief (APR) from IHT. In this context ancillary means that the woodland supports the agricultural land in some way. So, for example, a shelter belt or copse would support the agricultural land by providing shelter and so would qualify for APR.
Inheritance Tax – Business Property Relief
More substantial woodland is unlikely to be ancillary to agricultural land, so Business Property Relief (BPR) needs to be considered.
BPR will apply if the woodland is managed on a commercial basis – i.e. with a view to a profit from the sale of timber in a reasonable timeframe. This may need to be proved to HMRC and they will expect to see a woodland management plan in place (and being followed) and the involvement of a professional woodland manager or forester. HMRC may also want to see accounts or bank statements showing woodland expenditure and income, such as income from sales of timber following thinning or expenditure on vermin control. HMRC may also ask for details of any grant schemes joined and any such schemes would need to have a focus on producing saleable timber, rather than increasing the leisure value of the woodland or biodiversity.
If the woodland is not managed on a commercial basis, then in the context of landed estates BPR may still be available as part of a Balfour style claim. Briefly, this is where a farming or estate business qualifies as a trading business overall. To be a trading business, under current rules, more than 50% of the business must be in trading activities, rather than investment activities. Examples of investment activities include renting out land or houses. If the woodland is held in a trading business, then BPR at 100% can apply to the whole value of the business, even if the woodland itself doesn't qualify for BPR in its own right. Clearly however, given the potential for commercially managed woodlands to qualify for BPR in their own right, this is much the better option, as it may also assist a Balfour claim for BPR on houses or other rental properties which will never qualify for BPR in their own right.
Inheritance tax – other reliefs
If neither APR nor BPR apply to woodlands, there are two other reliefs to consider, although these are used less often in practice, as they operate only to defer rather than to eliminate IHT. Woodlands Relief can apply on death: this defers the IHT liability on the value of timber until it is disposed of. Secondly, Heritage Property Relief could be considered for woodland of outstanding scenic, historic or scientific interest, though this would require the woodland to be maintained and public access to be provided.
Capital Gains Tax (CGT)
Where as part of succession planning a gift of commercial woodland is being considered, then it is important to think about CGT. For CGT purposes there is a split between the value of the growing timber and the value of the underlying land. While the underlying land is subject to CGT, the value of growing timber is exempt from CGT, if the woodland is managed on a commercial basis. So although a gain in the value of the underlying land will be subject to CGT, an election for hold-over relief can usually be made - which effectively defers the payment of CGT until the land is sold or a further gift is made. There are however some restrictions on claiming this relief, for example, if the woodland has not been managed commercially throughout the entire period of ownership.
If non-commercial woodland is given away, then CGT will apply to the whole gain (land and timber combined). Hold-over relief can sometimes be claimed, for example if the woodland qualifies for APR or if the gift is made to a trust. It is also worth noting that if non-commercial timber is felled, the gain on the timber is usually exempt from CGT. This is because each tree is considered as one chattel and CGT does not apply to chattels valued at under £6,000 – so felled trees are effectively free of CGT. There would, however, be income tax payable on any profits (see below).
Income tax
Income which is derived from the occupation of woodlands managed on a commercial basis with a view to realising profit is not subject to income tax, nor corporation tax [1]. So the profit from felling a commercial woodland is not taxable. This is an important relief to bear in mind, particularly if thinning or felling is being considered in the near future.
The profit from the sale of non-commercial timber is however subject to income tax, although given the costs of extracting timber from small woods, the profits may be minimal.
Woodland and estate planning
The combination of the above tax reliefs, and particularly the CGT position, make woodland an attractive asset for tax planning. If commercial woodland is nearing maturity, then it would be wise to consider which generation of the family would benefit most from the tax free income. It may be that a gift of the woodland to the younger generation before felling is good planning, as that will avoid swelling the estates of the senior generation.
When considering making gifts of woodland, it is important to take good advice, plan carefully and keep good records. Such planning usually involves input from a land agent, an accountant and a solicitor.
Summary
For all three of the taxes described above, commercial woodland is generally treated more favourably than non-commercial woodland, so it is important to actively manage woodland for profit and have the records to submit to HMRC as evidence.
[1] HMRC's Business Income manual BIM67701
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