Time You Were Seeing the Wood for the Trees?
The financial news is full of the recent strong rise in timber prices, so now might be a good time to look at the UK taxation of woodlands as an investment. Over many years, government has tried to incentivise forestry, and it has become an interesting niche.
Income Tax. You might think that the income from woodlands, in the form of timber, would be subject to income tax for individuals and corporation tax for companies. Not so. Neither the proceeds of timber sales nor increase in value resulting from the growth of the trees is taxable as income, because of exceptions in the Income Tax (Trading and Other Income) Act 2005 (“ITTOIA”) s.11 and Corporation Taxes Act 2009 (“CTA”) s.37 which deem the occupation of land on a commercial basis with a view to realising a profit not to be a “trade”. However, there is a downside to this. It also means deductions are not available against income tax for costs, such as fencing, machinery or interest on loans to fund the purchase of woodlands.
Capital Gains Tax. The increase in value of growing trees is also exempt from Capital Gains Tax (“CGT”) under the Taxation of Capital Gains Act 1992 (“TCGA”) s.250, although gain on the land on which the trees stand is not exempt. When forestry land is sold, therefore, the value of standing or felled timber needs to be deducted from the sale price in computing any CGT due. As with other assets, there is currently no CGT charged on woodland owned by a person at the time of their death, as it is instead subject to Inheritance Tax (“IHT”) – but see below. Forestry “counts” as a business for rollover relief purposes (TCGA ss.152-158), so proceeds of sale of one block of forestry land can be invested in another without triggering a CGT charge and, indeed, proceeds of sale of another business can be reinvested in forestry land to avoid a charge to CGT that would otherwise arise. Similarly, if you make a gift of forestry land, holdover relief for gifts of business assets can be claimed (TCGA s.165(9)).
Inheritance Tax. On your death, your assets are included in the value of your estate for IHT purposes. That means that, subject to the normal “nil rate band” of £325,000 tax free, and transferable allowances including the allowance when a house is left to children or grandchildren, it is subject to tax at a flat rate of 40%. Commercial woodlands, however, if owned for at least two years before the date of death, are eligible for Business Property Relief (“BPR”) under the Inheritance Tax Act 1984 ss.104-6, which is currently at the rate of 100%. In other words, it escapes the IHT net altogether. Be careful, however. If the land is partly owned as amenity land, or not actively managed so that it does not meet the test of an asset used “wholly or mainly” for business purposes, relief may be denied, although land used for purposes of agriculture (e.g. growing other crops) may be eligible for Agricultural Property Relief (“APR”) instead. Also, if neither of these two reliefs apply, there is a special relief under s.125 which allows the executors to defer the IHT on the standing and felled timber to whenever it is eventually sold.
All in all, if you are happy to manage woodlands on a proper commercial basis, and to invest for the longer term, forestry is certainly an asset class which is now worth looking at.