December 16, 2019


DEFRA is developing its Tree Strategy for England which will be published in spring 2020. Meanwhile ELMS (Environmental Land Management System) provides an opportunity to bring forestry and woodlands to the forefront to provide public goods including carbon offsetting, water regulation, potential access providing health and wellbeing for the public as well as increased biodiversity.

Most farm and estate businesses have some woodland however, it is not at the top of the list for investment. Financially any incentives for planting are not sufficient to compensate for the permanent loss of income from alternative agricultural use or the high cost and risks involved to establish commercial woodland.

When it comes to the tax position, for income tax purposes, profits (and losses) from the occupation of commercial woodland are exempt from tax. Therefore there is no tax relief for the costs of establishing or maintaining woodland. Further there are no capital allowances for the cost of plant and machinery required to run commercial woodland.

For inheritance tax (IHT) purposes many assume that agricultural property relief (APR) will mean the woodland will not be chargeable to IHT. However, APR will only apply if the woodland is occupied with and ancillary to the agricultural land – this would include shelter belts or woodland actually occupied as part of the agricultural operations. Where there is a large block of woodland that is not occupied as part of the agricultural operations APR may not be available.

If APR is not likely to be available consideration is given to protecting the woodland from IHT by building a case to claim business property relief (BPR). To do this, the wood must be run as a commercial business. This will need to be evidenced in the business’s accounts and day to day activities.

For capital gains tax (CGT) purposes the sale of trees, standing or felled, from woodland managed on a commercial basis is exempt from CGT. Therefore when selling woodland, as the underlying land is taxable, an apportionment is required between the land value and the standing trees, timber and underwood. Rollover relief may then reduce the tax payable on the gain on the land, if it has been used in a commercial business.

Whilst commercial woodland has historically been unattractive for investment, given the potential future opportunities for owners of woodlands to provide public goods that could be paid for through ELMS or by those industries which need to offset their carbon footprint, we could see new potential income streams for farms and estates.

If more commercial woodland and forestry enterprises become profitable as a result of these potential new opportunities HMRC may need to revisit the existing income tax exemption - providing relief for expenditure and investment. At a time where farms and estates need to diversify and find new income streams grasping the climate change and ELMS opportunity may mean the future is bright (and green) for trees.


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