Woodlands: tax breaks for landowners

Woodlands and tax

It is certainly true that woodlands can be a tax-efficient venture. However, whether tax relief applies will depend on the type of woodland your client owns, and what purpose it will be used for. Simply owning woodlands is not a one-size-fits-all way of protecting wealth from tax.

Practice point. It’s similar to, say, agricultural relief for farmland. Simply buying something advertised as a “farm” doesn’t secure relief, there must be some related activity.

Common types of woodland

Commercial. A commercial woodland is one that is being used for the production of commercial timber. There are various associated tax reliefs for this type of woodland.

Amenity. Amenity woodlands are those not used in a commercial way. They are unlikely to qualify for inheritance tax (IHT) relief unless occupied in a way that is ancillary to agricultural land.

Short-rotation coppice. These focus on high-yield production of wood for fuel and are harvested over a two to five-year period. This is considered a farming activity, so any relief will depend on meeting the conditions for agricultural relief.

Practice point. Where trees are harvested over a period of more than ten years, the activity will generally be considered under the “commercial woodland” heading.

Ancient woodland. These may have the status of heritage properties, and a conditional exemption from IHT and capital gains tax (CGT) may be available (click here ).

We will mainly be considering commercial woodlands in this issue.

Commercial woodlands

Different taxes (and the related reliefs) impose differing conditions and requirements. However, a common theme is that the woodland must be occupied commercially to benefit.

Practice point. Woodlands are occupied commercially where they are managed on a commercial basis with a view to realising the profits.

Practice point. Demonstrating this may require application of the badges of trade indicators, and evidence of systematic management.

Income tax

Income that is generated by the occupation of commercially managed woodlands in the UK is outside the scope of income tax by virtue of ss.11, 267 and 768 Income Tax (Trading and Other Income) 2005.

It is important to note that the scope of relief for “occupation” is limited. If the activity goes beyond mere occupation, there may be a separate trade that needs to be considered in its own right.

In Christie v Davies (1945) , the taxpayer owned more than 500 acres of woodlands, managed as a single unit on a commercial basis. In order to sell efficiently, a sawmill was installed. This was used to process timber from both his own woodland and purchased elsewhere. It was held that he was not assessable to income tax on the profits from the sawmill to the extent that they related to timber grown on his land, but profits attributable to purchased timber were subject to income tax.

So, merely processing the wood, e.g. into planks, is within the remit of occupation. However, in Collins v Fraser (1969) , it was held that further processing into boxes and crates is not.

Practice point. Where profits are not (or would not) be charged to income tax, no relief can be given for costs associated with management of the woodlands. Additionally, losses will not be relievable.

It is possible that your client will derive income from the woodlands in other ways, e.g. by allowing camping, archery, fishing or shooting in exchange for payment. This will be a separate activity and attributable costs will be deductible accordingly.

Short-term harvesting

Short-rotation coppice activity is not exempt. This is where timber is harvested, but the roots of trees are left to produce further shoots. This is a type of husbandry and is treated as farming, i.e. trading.

The case of Jaggers (t/a Shide Trees) v Ellis (1997) , established that a business of growing, cultivating and selling Christmas trees was not a commercial occupation of woodlands, as the trees were not mature. Also the site had the hallmarks of a nursery rather than a woodland, and the activity was one of market gardening (and therefore taxable).

Practice point. This was decided in the High Court, and the decision includes the useful benchmark that “woodlands” means a sizeable area of land covered with trees… probably for use as timber”.

Leasing

If your client leases the land, either as woodland or where woodland is later created, any profits are taxed as a property business, as the owner is not occupying commercial woodland (though the tenant may be in their own right).

Capital gains tax

Where a woodland that is commercially managed is sold, your client can omit the disposal proceeds that relate to the trees growing on it under s.250 Taxation of Capital Gains Act 1992 . The land itself remains chargeable, so it is necessary to separate the proceeds (and costs) relating to both.

Example. John purchases woodland in England for £300,000. Following negotiations, the value of growing trees is agreed at £200,000. The woodland is later sold for £500,000. £320,000 of this relates to the growing trees. The chargeable gain will be £180,000 less £100,000 = £80,000 after excluding the relevant parts of the proceeds and costs.

Practice point. Assistance with valuing the amount attributable to growing trees should be requested from the Valuation Office Agency (click here ).

If the woodland has multiple uses, e.g. partly commercial and partly amenity, an apportionment will need to be made between the commercial part and the non-exempt part.

Felled trees

There is no requirement to apportion the value between trees and land where the land sold is agricultural or amenity woodland. However, if a disposal includes trees that have been felled on agricultural or amenity woodland, their value is not covered by the exemption in s.250 . However, a revised version of the chattels exemption applies. Each individual tree is treated as a chattel, so unless a single tree is sold for more than £6,000, no CGT will be payable.

Practice point. The anti-avoidance rules applying to sets of chattels don’t apply to trees.

Insurance proceeds

It is possible that trees in a commercially-occupied woodland become damaged. Specialist woodland insurance covering fire and “windblow” damage can be obtained. If an insurance payout is received in respect of damaged or destroyed trees where the sale would have been income from the commercial occupation of woodlands, the exemption extends to the insurance payout.

Example. Gary owns a commercial woodland, and periodically fells and sells trees as timber. His income is exempt from income tax. In 2024, part of the woodland is damaged by wildfire, leading to the destruction of one tenth of the trees. Gary receives an insurance payout of £700,000. This payment will be exempt.

VAT

There is no exemption under VAT law for commercial woodlands, so even though the income can be exempt from income tax, your client would need to register for VAT and charge output tax at 20% in accordance with the general registration rules, i.e. compulsory registration will be required if one of two tests is met.

Historic test. If the taxable sales made by your client have exceeded £90,000 in any rolling twelve-month period, they must register from the beginning of the second month after exceeding the threshold. For example, if sales exceeded £90,000 for the first time in the twelve-month period to 31 May 2024, they will register from 1 July 2024.

Future test. If their taxable sales are expected to exceed £90,000 in the next 30 days, they must register at the beginning of the 30-day period.

Practice point. Registering will mean your client can recover input tax on costs relating to the commercial woodland. They could also consider registering on a voluntary basis, especially if their customers are likely to be VAT registered.

Inheritance tax (IHT)

The IHT position of woodlands will depend on how it is used. Business property relief (BPR) is available at 100% on commercial woodland, as long as it has been owned for at least two years at the date of death.

Practice point. Unlike CGT, BPR is not restricted to the value of the trees, but applies to the underlying land as well.

Where the two-year condition is not met, by default the full value of the woodland is included in the estate, though the IHT may be able to be paid in instalments.

Non-commercial woodland could qualify for agricultural property relief (APR) if it is occupied with, and ancillary to, agricultural land (or pasture). Examples would be woodland shelter belts, game coverts, spinneys, etc.

Woodlands relief

The nature of woodlands is such that trees can take many generations to mature. In the absence of any provisions, the same trees could be subject to IHT on successive deaths, unless BPR or APR apply (see above). If neither relief applies, a specific relief under s.125 Inheritance Tax Act 1984 is available. Where this woodlands relief applies, the value of trees or underwood, but not the land, can be excluded from the death estate, with IHT instead payable when the trees are disposed of other than by way of a gift to a spouse or civil partner.

Practice point. This treatment must be claimed by the person liable for the tax, generally the personal representatives.

Practice point. The Finance Bill (No 2) 2024 contains provisions to restrict the scope of APR and woodlands relief to UK property. This will apply from 6 April 2024 once Royal Assent is granted.

To qualify for the relief, the woodland cannot be agricultural property, e.g. used as shelter for farmland. Additionally, the deceased person must:

• have been beneficially entitled to the land throughout the five-year period ending with the date of death; or
• have become beneficially entitled to the land other than for consideration in money or money’s worth.

Practice point. This means that there is no minimum ownership if the land was gifted or inherited by the deceased.

If the person inheriting the woodlands dies without making a disposal, the original deferred charge (on the first death) is never brought back, and the personal representatives can elect to make a new deferral.

Advising your client

There are several practical tips you can use to help your client.

1. Ensure they are aware of the meaning of “occupied for commercial purposes”, and keep any additional activity separate.
2. Good record keeping will be essential to demonstrate active commercial management in the event of an enquiry. Simply selling the odd bit of felled timber is unlikely to qualify, so get the client to set out their plans in writing, in as much detail as possible.
3. For IHT purposes, meeting the conditions for BPR will be most beneficial. However, if the land is managed in a partnership, ensure it is the partnership that actually owns the woodlands. If the ownership is retained in one of the partner’s names, relief will be restricted to 50%.
4. Woodlands relief acts as a deferral, but should be used as a backup, i.e. every effort should be made to ensure BPR applies instead.