The pros and cons of investing in woodlands
Part of the attraction of investing in woodlands is the tax-saving opportunities that come with them. But is it more tax efficient to receive the tax breaks by investing personally or via a company?
The hope for any returns from investing in woodlands is that it will increase in value and woodlands have performed well over the last decade, along with the tax breaks.
Profits from selling the timber from your woodlands, whether felled or standing, are exempt from income and corporation tax. While the gap between timber harvests can be long, you can exploit the land for other uses in the meantime, e.g. letting it out or running a paint-balling business. However, the tax exemption doesn’t apply to such business profits. The normal rules for letting land or trading apply instead.
As far as profits from sales of timber are concerned personal ownership has the advantage. While profits made by a company are tax free, extracting them isn’t. Taking salary or dividends usually results in a personal income tax bill for the recipient.
A large part of the value of woodlands lies in the timber. The more mature it is, i.e. close to felling when the land is sold, the greater the price of the woodlands. The increase in value attributable to the value of timber is exempt from tax whether owned by you personally or your company. Conversely, any gain attributable to the land isn’t exempt.
Personal ownership again has the advantage for the same reasons as those already mentioned for profits. A further advantage is that as an individual you have an annual capital gains tax exemption which reduces the tax payable.
There are a few IHT reliefs that can apply. Business property relief (BPR) eliminates IHT on the value of the woodland (land and trees) where it’s been owned for two or more years and has been run as a business. For example, timber harvesting, shooting rights, use as a leisure facility, e.g. a camping site that includes facilities, shooting rights, etc.
Where BPR doesn’t apply agricultural property relief (APR) might. This too completely eliminates IHT where the woodland has a direct or ancillary agricultural purpose. For example, it’s used for short rotation coppicing or as a “shelter belt” for farmland.
There’s also a relief specifically for woodlands but it’s rarely claimed as BPR or APR usually apply first. Plus, it’s only a deferral of IHT until the sale of the timber. Last on the list is heritage property relief. It applies if the woodland is of outstanding scenic, historic or scientific interest.
Personal or company ownership of woodland can benefit from the IHT reliefs. But for company ownership it’s only achieved by BPR or APR and for this to apply your shares, and the company’s activities, must meet the conditions. Therefore, again, personal ownership of woodlands has the advantage.
Can’t see the wood for the trees? If you need advice about protecting your wealth, get in touch and we can discuss your options.