SEEING THE WOOD FOR THE TREES
Most farming businesses have some woodland on the farm. However, when it comes to the tax position, often the woodland is forgotten about. With the value of woodland increasing and the need to create new income streams on the farm now may be the time to see the wood for the trees.
For inheritance tax (IHT) purposes woodland should not be overlooked and is an area that HM Revenue and Customs is focusing on. 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 shelterbelts 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 an available consideration should be 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 it is also recommended that the business has a woodland plan for all areas of wood on the farm.
For income tax purposes profits (and losses) from the occupation of commercial woodland may be outside the scope to tax. However, this exemption does not extend to profits of timber merchants – an activity that goes beyond the occupation of woodlands, such as processing the timber and turning the felled timber into planks for example. Christmas tree farms are also not covered by this exemption, although Christmas trees produced from thinnings and tops of felled trees around the farm can be covered by the exemption.
Given the increase in the value of woodland on the farm, where a business needs cash, consideration may be given to selling the wood. 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 and entrepreneurs’ relief may then reduce the tax payable on the gain on the land if it has been used in a commercial business.
The tax position for woodland is complicated but the opportunities for income, capital and reducing tax liabilities in the future has potential so they are worthy of some consideration on the farm.