Commercial woodland continues to offer significant tax advantages and can form a key part of a diversified portfolio.
From a tax perspective, the owner can enjoy tax-free income, partly tax-free gains (with other reliefs available to reduce or defer gains) and 100% relief from Inheritance Tax:-
Sales of timber are not subject to income tax or corporation tax (ITTOIA Section 10(3)(c) provides that the occupation of commercial woodlands will not be subject to charge as profits of a property business). Evidence of past production, future intention and production of timber are important to show that the woodlands are run commercially. The flipside of this is that any losses cannot be offset against other income.
Woodlands which are let (for a phone mast, paintball site etc.) where the owner receives rental income are subject to tax as profits of a property business. Similarly, other uses of the woodlands will be subject to income tax e.g. sporting rights, camping sites and Christmas tree production (which falls outside the definition of commercial woodland).
If the land is predominantly used for other purposes, the receipts from the felled timber might fall outside the general exemption.
Profit from the sale of trees is exempt from CGT where the trees are sold from commercial woodlands. Only capital profits on the solum (the underlying land) are liable to CGT. Where the woodland is sold as a whole, an apportionment is made between the value of the standing trees, timber and underwood and the value of the solum. The portion attributable to the solum can qualify for holdover relief, rollover relief and Entrepreneurs’ Relief.
Inheritance Tax – Business Property Relief (“BPR”)
BPR should be available on commercial woodland, provided that it is not “agricultural property” – see below. It is useful to have separate woodland accounts to show that it is run commercially. Provided that the woodland has been held for two years, then the total value of the woodland (both standing timber and the solum) can qualify for 100% relief from Inheritance Tax. BPR can also apply where business property (such as an interest in a trading business) is disposed of and replaced with business property (such as commercial woodland) acquired within three years; and the ownership periods of the “new” and “old” property together total two out of the last five years.
“Agricultural property” for this purpose would include woodlands if occupied with agricultural land or pasture and that occupation is ancillary to the agricultural land or pasture, in which case Inheritance Tax Agricultural Property Relief (“APR”) may be available at a rate of up to 100%.
In the event that neither BPR nor APR is available, then “Woodlands Relief” might apply, meaning that Inheritance Tax on the timber value only could be deferred until the natural occurrence of felling has taken place to produce cash for the payment of tax.
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