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With growing focus on environmental aspects and the transition from Basic Payment to Environmental Land Management schemes, some farmers have been planting forestry, or are considering doing so. It should be noted that woodlands have a special tax regime.
Income Tax
Proceeds from woodland timber sales are exempt from income tax. ‘Woodland’ means a sizeable area of land that is to a significant extent covering by growing trees of some maturity, height and size.
The income tax exemption extends to forestry scheme grants, but not to farm woodland scheme grants (which HMRC regard as taxable compensation for lost farming income).
As new grants are introduced, it will be necessary to check whether they are tax exempt forestry or taxable farming income.
The income tax exemption does not cover:
Property income from renting out a woodland
Trading income from ancillary activities, such as the processing of timber (e.g. planking or firewood), or the running of a shoot, motorsport or recreational activity in a wood
Short rotation of coppice; i.e. the intensive cultivation of trees (such as willow or poplar), planted at high density, with the stems being harvested at intervals of less than 10 years. This treated as farming trade
Christmas trees grown specifically as a crop for sale
Timber income from farm trees or hedges, rather than a defined woodland area
The woodlands income exemption is much less of an advantage than might be expected, because it also means that there is no income tax deduction for the costs incurred and, historically, many commercial woods have been loss-making; particularly when managed by paid contractors or employees. Capital allowances are not available on machinery for the tax exempt woodlands activity, nor income tax relief on the initial clearing and preparation of the land.
Capital Taxes
For both capital gains tax (CGT) and inheritance tax (IHT) there is a crucial distinction between commercial amenity woodland.
Commercial woodland is where the trees are grown to be sold as timber. This activity will incur regular operational costs and on enquiry (e.g. the event of a capital tax relief being claimed), HMRC would expect there to be records available of woodland management costs that were incurred over the years and not claimed for income tax deduction.
In the long term, there are major capital tax advantages in running woodland as a commercial activity:
| Commercial Woodland | Amenity Woodland |
Capital Gains Tax | Capital gain on the timber is exempt Capital gain on the land is taxable, but may qualify for rollover, holdover or business asset disposal relief | Capital gains on the land and standing timber are taxable (but felled timber is usually exempt due to chattels relief) Business reliefs are not available |
Inheritance Tax | Land and standing timber qualify for Business Property Relief | Land and timber are IHT exposed (subject to any available Agricultural Property Relief) but the charge on the timber can be deferred until it is sold (‘woodlands relief’) |
VAT
Sales of timber (and Christmas trees) are standard rated (20%) for VAT.
Sales of timber for fuel are standard rated if sold to a merchant, but eligible for the reduced rate (5%) if marketed as firewood and sold directly to the end user.
The fact that timber sales are VAT ‘able has the advantage of supporting input VAT reclaim on the expenses of a commercial woodland’s activity.
It is important that farmers consider the very different tax regime for woodlands at the outset. We would be glad to advise on the tax implications of your plans. Please contact us here.