Don't get a tax surprise if you go down woodland route

The area of woodlands and tax is one that is often misunderstood.

The below briefly highlights some of the key tax issues including income tax, VAT and capital taxes.

Income tax: If a woodland is commercially occupied then income will usually be tax-free. For this there needs to be a long-term profit-seeking motive.

HMRC recognise that woodland is a long- term business and you do not need to profit immediately or indeed every year.

A woodland management plan showing how and when income is likely to be received can be good evidence of commerciality.

A separate profit and loss account will need to be maintained including woodland income and expenses.

You will not receive tax relief for these expenses nor will you be able to claim capital allowances on any woodland plant and machinery.

For income to be classed as tax-free it is important that processing of timber is kept to a minimum.

As soon as the timber is turned into a product then the woodland business will be treated as a taxable trade.

VAT: Registering the woodland business for VAT may help with the argument that it is commercially occupied.

Care is needed where an individual or business is already VAT registered.

Output VAT will need to be charged and this will vary between 20 per cent for general timber to five per cent for wood sold for domestic fuel.

Input VAT on associated costs can be reclaimed in accordance with the normal VAT rules.

CGT: Assuming that the woodland satisfies the commerciality tests then the gain on the timber element or any woodland sale will be exempt from capital gains tax.

The underlying land does not benefit in the same way.

However, it may be possible to roll this gain over into another qualifying asset.

IHT: Once the commercial woodland has been owned and occupied by the owner for two years it will qualify for 100 per cent Business Property Relief and so no inheritance tax will be payable on death.

However, this is not the case for amenity woodland, including woodland used for your own consumption.

Renewable Heat Incentive projects can be hugely beneficial; however IHT needs to be part of the considerations.

For example, if a relatively small area of woodland is being used to fuel a large boiler to heat a large private house, then that woodland may cease to be commercially occupied.

This could potentially jeopardise valuable IHT reliefs.

If you believe that your own woodland business structure may not be set out in the correct way then you should take professional advice to ensure that there are no hidden surprises.

* Tom Downes is a member of Whittingham Riddell's specialist Rural Services Team