Business Clinic: Tax advice on making more of woodlands

Whether it’s a legal, tax, insurance, management or land issue, Farmers Weekly’s experts can help. Here, Paul Topham of accountant Baldwins explains the ins and outs of tax on woodland.

Q. We have about 35 acres of woodland on our mixed farm and have not managed it much other than to clear fallen trees for our own firewood.

Now we would like to make more of it. Selling timber is an obvious option and I’ve heard that woodland has favourable tax treatment but don’t know the detail.

Can you advise how we should go about this, what the tax considerations are and any pitfalls?

A. Making the most out of your woodland could be a great form of diversification and help to manage a post-Brexit future.

With the demand for timber being strong, prices have been increasing for several years and are currently at an all-time high.

It could provide you with a sustainable income stream to help supplement your farm income.  

Tax considerations

• Profit generated from the sale of unprocessed timber from the ownership of commercial woodlands is exempt from both income and corporation tax. However, this means that the costs associated with production and sale of the timber are not allowable expenses for tax purposes .
• It’s important to identify the costs and income for the woodland separately to those of the farming operation, even though they are likely to be within the same business and set of accounts.
• The sale of timber is a standard-rated (20%) supply for VAT unless sold as firewood (in which case it’s 5%).
• Forestry and commercial woodland would qualify for rollover relief from Capital Gains Tax (CGT). This would allow a capital gain on the sale of a qualifying business asset to be deferred into the purchase of commercial woodland, making it very attractive to investors should you wish to sell in future.
• If you were to sell a commercial woodland, the proportion of the value relating to the growing crop of timber would be free of CGT. However any increase in the value of the land would be subject to CGT, although capital costs incurred since acquisition of the woodland such as those for fencing, gates, roads or tracks and legal expenses could be offset.
• Commercial woodland qualifies for up to 100% Business Property Relief (BPR) once held for two years, reducing Inheritance Tax (IHT) payable on death.

See also: Business Clinic: Rollover relief from Capital Gains Tax 

Pitfalls

• It is important to demonstrate that the woodland has been ‘commercially occupied’ to qualify. How this is achieved depends on the circumstances, including the extent of the woodland and types of trees, for example, showing it has been managed with a view to a profit could include active management such as planting, thinning and felling, as well as grant applications and advice from a recognised forestry professional.
• Income from short rotation coppice (harvested within 10 years) is classed by HMRC as income from farming rather than commercial woodlands.
• Profit generated from growing Christmas trees is included in farming income and so is taxable, but any associated costs could be deducted for tax purposes.
• It is important to get the ownership structure right – there are many options and it is worth spending time with both legal and tax advisers on this and the other aspects mentioned above.
• Other uses of the land should not be ignored before deciding whether to manage the woodland commercially. For example, the woodland may provide valuable shelter for livestock, and opportunities such as letting the land for paintballing may generate more, albeit taxable, income.

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