Inheritance Tax (IHT)
Commercial woodlands qualify for 100% relief from IHT when you have owned them for more than two years. This includes the value of the trees and the underlying land.
Capital Gains Tax (CGT)
You can ‘rollover’ capital gains into the purchase of commercial woodlands and should you die whilst the rolled over gains have not crystallised, the rolled over gain dies with you effectively, wiping out the original gain. Should you sell your woodland in your lifetime then any gain held over will not become payable until you sell the woodlands. Of course, the usual restrictions to rollover relief apply in that only certain gains can be rolled over.
The increase in the value of growing timber is completely free of CGT. Whilst the timber is tax free the underlying ground is still taxable. However, the majority of value is usually held in the timber, and underlying land prices do not generally increase dramatically. Even so, with CGT at such a low rate I am sure you would not mind a little bit of tax to pay.
Income Tax (IT)
All income generated from commercially managed woodland is completely free of income tax (and corporation tax).
Can My Company Buy Woodlands?
In short, the answer is yes and your company will not have to pay corporation tax upon the sale of timber or sale of woodland (timber only) in whole. This is all very well but getting the cash out of the company will then create a tax liability, so why bother? The answer may be that your company is sitting on a cash mountain and extracting the cash to buy woodland would create a tax liability in any case. The purchase of woodland for your company is an investment in a commercial business, and thus any issues you may have had from having large amounts of sitting cash will dissolve away. Such issues would be in relation to IHT under the excepted assets principals where identified investment assets are excluded from IHT reliefs.
Another reason for your company investing in woodland may come from conversion to an investment company where your company would normally pay a large amount of CT on capital gains upon sale of its assets. The effective rollover into woodland could avoid your company paying corporation tax on its gains and further tax on its new timber sales income. Your company could in fact become a very tax efficient pension vehicle. If the company was to pay, say, you and your spouse just enough dividends to keep you under the higher rate threshold, then the dividends would be tax free. If you were to receive no other income from elsewhere, you could pay yourself and your spouse as much as £39,500 each in dividends free of income tax. That is CT free and IT free!
One disadvantage to a company owning woodlands is that the expenses in managing the woodland cannot be claimed in the company accounts, which in fairness make sense.
Own It Personally
Owning the woodland personally is certainly easier than owning it through a company upon the grounds that there is no need to worry about tax on dividends or salary payments. It’s pretty much all tax free!
Investment in woodlands is a specialist area and it is advisable to speak to both a tax adviser and an independent financial adviser with a forestry investment background.
This article was first printed in Tax Insider in February 2010.