Christmas trees and forestry tax reliefs

With everyone bringing Christmas trees indoors at this time of year and with increasing concern for the environment and rising timber prices, forestry is looked at as an important investment. But what about the available tax reliefs.  What tax reliefs are available for forestry and are Christmas trees treated the same.

Commercial forestry has important reliefs for income tax, capital gains tax and inheritance tax.   

What are Commercial Woodlands?

Woodlands are treated as commercial if they are “managed on a commercial basis with a view to the realisation of profits”. You should be able to evidence the intent to make profits, for example, accounts and records should be kept showing historic details of any profits and losses made.

Income tax

The income arising on woodlands is exempt from income tax when it is received from the occupation of commercial woodlands and land being prepared for forestry and from the sale of timber. This can be a valuable tax benefit as with the current timber prices there are significant incomes arising .  It does not matter what the level of income is, if it is from qualifying commercial woodland, there is no income tax on the income. 

The only downside to this is that any expenditure incurred on the woodlands, for example fencing and drainage would not be allowable expenditure for tax.  There are however, many grants available for planting and maintaining woodland and many of these grants are also not taxable to income tax.

Income received from the sale of short rotation coppice, trees which are harvested at intervals of less than ten year, do not qualify for the exemption and will be subject to income tax.   This includes Christmas trees.  So while there are great exemption for many woodland crops, the sale of Christmas trees is subject to income tax.

Where an owner of woodlands receives rent from letting their woodlands, this income is subject to income tax. For example, income generated from picnic and camp sites in woodlands or sporting rights in the woodlands.

Capital gains tax

No capital gains tax (CGT) liability arises from the sale of any felled or standing trees from commercial woodlands. However, gains arising from the sale of the land on which the trees are situated, is liable to CGT. It is important that on any acquisition or disposal of woodlands separate valuations for the value of the timber and land are obtained, failing this an apportionment would be made on a just and reasonable basis between the value of the land and the timber/trees.

When gifting commercial woodlands, gift holdover relief can be available on the gains arising.  The gain would be deferred until a later date when the recipient of the gift disposes of the woodlands.

As the occupation of woodlands is not a trade, the disposal of commercial woodlands is not a qualifying business asset and does not qualify for Business Asset Disposal Relief (BADR).

Gains arising on the sale of land from commercially run woodlands may be eligible for rollover relief. Relief is given by rolling over the gains against the cost of replacement business assets such as further woodlands.

CGT is payable on sale of the timber from non-commercial woodlands, however, provided the gains arising from the timber do not exceed £6,000 the chattels exemption can apply.

Inheritance tax

Agricultural Property Relief (APR) is available in full on trees where the woodlands are not occupied with agricultural land, but the woodlands are a necessary support to the agricultural land such as trees used as shelterbelts.  Woodlands occupied for other purposes than agricultural ones such as woodland used to produce commercial timber will not be agricultural property and therefore not qualify for APR. However, they may be eligible for business property relief (BPR) or woodlands relief.

Business property relief currently gives 100% BPR from Inheritance Tax (IHT) on Commercial woodland, provided the woodlands were owned for two years.

If APR and BPR are not available, at the time of death, the beneficiaries of the woodlands can ask that woodlands relief for the value of the timber (but not the land) be excluded from an individual’s estate. This is on the provision that the individual owned the woodlands for five years. When the timber is subsequently sold, IHT will be due on any proceeds received on the sale of the timber less any allowable expenses, these expenses include the costs of replanting after disposal.

Certain woodlands may qualify for Heritage Relief and therefore may be exempt from IHT. This relief is available for assets of a national heritage quality such as land of outstanding scenic, historic or scientific interest if the other conditions are met.

If you need further information on the tax reliefs on Woodlands, please get in touch.

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Lucy Crow

Lucy Crow

I am Chartered Tax Advisor qualified and have worked in tax for over 12 years, specialising in personal tax.  I work with a wide range of personal tax clients, from small sole traders to high…