What You Need To Know About Tax Avoidance And Woodland
Any income that you get from timber sales is exempt from UK income tax. No income tax exemption is available against capital purchases or annual costs such as new plantings, fencing or roadways. Forestry Commission grant payments are also tax free, except for payments to compensate for agricultural income that you would have otherwise earned, e.g. if you are turning fields over to woodland.
Woodland and Inheritance Tax Avoidance
After 2 years of owning the land, commercial forests owned by an individual usually attract 100% Inheritance Tax Business Property Relief, which removes them from any IHT charge. If a donor dies within the first 2 years of someone owning it then any Inheritance Tax liability can be paid in instalments spread over 10 years interest-free.
Woodland and Capital Gains Tax Avoidance
There are no Capital Gains Tax liabilities on any gain in the value of commercial tree timber. All gains realised on the sale of timber can be portioned into profit on the trees which is Capital Gains Tax Free, and the rise in the value of the land, which is also Capital Gains Tax free, so for capital gains tax avoidance Forestry is great.
A common tax avoidance loophole is to re-invest funds from a previous capital gain, for example a second house or commercial property sale, into forestry. If the reinvestment occurs 1 year before or within 3 years after the time when the CGT liability fell due, then the Capital Gains tax gets roll-over relief, and in effect as long as you hold the timber for longer than 2 years no further Capital Gains tax would be due.
If you set up a trading company that owns forestry you would legitimately be able to do tax avoidance as it would not be liable to corporation tax either.
Expenses for forestry will normally be charged out to you with VAT added, so it's generally beneficial to voluntarily register for VAT purposes.
Stamp Duty Land Tax
Current UK Rates as at September 2011 apply to all commercial real estate purchases, which does include forestry. Woodlands costing less than £150K are tax free, £150K to 250K pay 1% and above 250K it's 3% so bear in mind the size of the deal when purchasing. It may be advantageous to buy a tract of woodland in separate pieces or transactions, as long as the extra purchasing and solicitor fees from more transactions doesn't outweigh the advantage of less Stamp Duty taxes. So depending on the tract of forestry you buy and the size of it tax avoidance is a great benefit of holding woodland.