Posted by: davidgarnerconsulting | October 5, 2009

Forestry Investment and Tax

Difficult to believe, but income generated from the ownership of commercial woodlands is completely exempt from both income tax and corporation tax.

No tax therefore is payable on income from felling timber, nor, importantly also, is income tax charged on the profits on selling woodland itself.

This means that the average income of 5% per annum from felling timber is worth 8.33% to a 40% taxpayer, and 6.41% to a 22% basic rate taxpayer. If you realised the average return from buying a forest on 1 January 2006 and selling it on 31 December 2006, you could have made as a high rate taxpayer, the equivalent of 34% grossed up.

Most investors will want to purchase for the longer term and to realise tax free income at times and in amounts to be chosen by them as circumstances prescribe.

For example, if you want tax free income over the next 5-10 years to pay for school fees, you need to purchase a woodland planted about 20-30 years ago. At this stage the trees will be about half way through their average growth period to maturity. Provided it has been well managed, as timber moves towards maturity at 40 years, more of it can be felled and higher prices achieved for it too.

On the other hand, if you are using the woodland investment to provide a tax free pension in, say, 30 years time, you are likely to want to purchase woodland which is being, or has recently been, planted. Then when in 30 years you start to draw your “woodlands” pension, you will be free to fell just enough timber each year tax free to meet your expenditure needs. Note that you will not actually be investing in a pension scheme, so you will avoid being tied down by all the restrictions relating to payments into and out of such schemes.

If you have more than enough tax income to meet your normal needs, you can gift the surplus income (which is tax free to you) or any part of it to a dependent friend or relative, without you or them having to abide by the paltry limit on lifetime transfers of just £3,000 a year.

Capital Gains Tax (CGT)

There is good news too for woodland investors on the capital gains tax front. Gains in the value of timber are completely exempt from CGT.

Only real increases in the value of the land, after allowing for inflation and the cost of any capital improvements, will be liable to CGT.

If the woodland is held until death as part of a plan to save on Inheritance Tax, then any potential CGT liability will be extinguished on death.

In addition woodlands are qualifying assets for CGT roll-over relief. This means that any CGT liability on sale of a business asset can be deferred by investing in forestry assets, and deferred permanently if the forest investment is held until death.

If you gift woodland assets during your lifetime, it is possible for the beneficiary to qualify for hold-over relief from any CGT on the land element of the gift. The timber value part of the gift is exempt from CGT anyway.

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