By Carol Cheesman, Cheesmans Accountants
If you have surplus cash then it makes sense to invest it and get it working for you. There are, of course, many ways to do this. With interest rates remaining low for the moment, buying woods or a forest is becoming increasingly popular.
Recently the value of commercial woodlands has been increasing and they offer many tax advantages for investors.
For example, where there is a commercial occupation of woodlands in the UK, the income and profits made from sales of the timber are not subject to income tax or corporation tax.
Occupation is deemed to be commercial if the woodland is managed on a commercial basis for the realisation of profit. On the other hand, it is important to understand that any revenue receipts or rents resulting from further activities for example sporting rents – are taxable.
I have advised many clients looking to purchase woodland and have the following advice:
Broadly speaking if you wish your investment to be assessed as being “commercial” you will need to:
• Sell timber, firewood or woodland products and to keep a woodland profit and loss account
• Have a set of management objectives for the woodland which include the production of timber or timber products, and for the management plan to be approved by the Forestry Commission
• Being VAT registered may be seen as supportive evidence of owning “commercial woodland”.
For Capital Gains tax purposes, where a person who owns commercial woodlands with a view to generating profit, no Capital Gains Tax will be payable in respect of:
• monies received for the disposal of trees standing or felled or cut on the woodlands; or
• insurance proceeds in respect of the destruction of or damage or injury to the trees by fire or other hazard.
In addition, the sale price or transfer value of the trees is also left out of Capital Gains Tax calculations. Only the increase in the value of land is assessed for Capital Gains Tax.
The investment in woodlands is deemed as a business asset and is therefore eligible for roll-over relief. If any gains on the disposal of business assets arise within the period of one year before, and three years after the acquisition of the woodland, the gain could be rolled into the base cost of the woodland. This defers the gain until such point as the woodland is disposed of.
In relation to Inheritance Tax, the entire value of commercial woodlands, including both the land and the trees, attracts Business Property Relief - currently at 100% - once it has been owned for two years. There is no Inheritance Tax liability as long as this condition is met.
Commercial woodlands are not exempt from VAT registration and woodland sales can constitute a taxable supply. The registration for VAT purposes is compulsory where taxable supplies exceed £81,000 in the previous 12 months. Voluntary registration by the occupiers of commercial woodlands is generally desirable, particularly during the development of a plantation, as the effect of the registration is that VAT incurred on expenditure in the woodlands may be recovered.
On the sale or gift of a woodland, by a registered trader, the disposal of standing timber usually escapes a tax charge if the business is transferred as a going concern.
Woodlands are commercial properties for the purpose of Stamp Duty Land Tax and attract duty on sales above £150,001.
Despite the noticeable tax incentives associated with commercial woodlands, when it comes to investing it is important to assess both the risks and rewards, and review in detail whether this opportunity is suitable for you. It is always advisable to seek professional advice.