Woodlands Tax Relief and Maximising Incentives

As the focus on climate change increases, the financial and environmental benefits of woodland of all sizes will come into focus. I am not advocating the large scale planting of upland area, and will leave it to others to advise on the grants available.

In the past, the value of land for agricultural use was higher than for planting trees. However, greater incentives for planting trees and reduced agricultural support after Brexit may change this.

The main tax issues surrounding woodlands are as follows:

Income Tax

The commercial occupation of woodlands is free of Income Tax and Corporation Tax. This means that income from the sale of timber and most grants received are free of tax. It also means that any associated expenses do not receive any tax relief. Where there are woodland transactions in a farming business it is necessary to carefully identify these to ensure the correct tax treatment. Other income received from woodlands, e.g. rent received for leisure activities, are taxable in the normal way.

Capital Gains Tax

There is also an exemption from Capital Gains Tax (CGT) for the value of growing timber. Thus if an area of commercial woodland is sold, the value needs to be split between the underlying land and the trees themselves. It is only the increase in the value of the land that is subject to CGT. As mentioned above, the value of land used for woodland has increased in recent years, so a CGT liability on the sale of woodland is now more likely.

Value Added Tax

The sale of growing timber is standard rated for VAT purposes. This means that when timber is sold by a VAT registered business, 20% VAT needs to be added to the price. Similarly VAT incurred on costs of planting and maintenance can be reclaimed.

If woodland is purchased by an individual or partnership that is not currently VAT registered, then it can register in order to reclaim VAT on expenses. This is the case even though it might be many years before the business receives any income from selling timber.

Inheritance Tax

Woodlands can qualify for either Agricultural Property Relief (APR) or Business Property Relief (BPR). Small area of woodland such as shelter belts which are “ancillary” to the farming business can qualify for APR, whereas larger areas will only qualify for BPR. To meet the conditions for BPR, the woodland must be owned for at least two years, and be managed on a commercial basis. HMRC expect to see a management plan for the woodland before they will accept that woodland is occupied commercially.

Other thoughts

The ability of woodland to capture and store carbon dioxide means it has a key role to play in fighting climate change. This results in a potential source of additional income through trading carbon credits:

• Under the Woodland Carbon Guarantee Scheme introduced in 2019
• To commercial organisations such as airlines who want to offset the carbon credits against their own emissions.

Whilst this is attractive, care needs to be taken not to put your business at a disadvantage by joining up to these schemes. We know that future agricultural support will have a greater emphasis on environmental issues – “public goods for public money” as Michael Gove described it – and until we know details of these schemes we don’t know if selling carbon credits will put businesses at a disadvantage. A similar issue may also arise if customers, for example milk buyers, supermarkets, etc. insist on all their suppliers proving that they are carbon neutral.

It is therefore essential that businesses take specialist advice on this topic before taking action.

Finally, we have recently been asked whether receipts from carbon credits are exempt from income tax as described above. There is no clear answer in either legislation or HMRC guidance, due to their newness. Our view is that the receipts arise from the commercial occupation of woodlands and should therefore be free of tax, but await clarification from HMRC.