Can HMRC take an axe to your woodland business?

There are signs that HMRC is taking a closer look at tax reliefs for commercial woodland. The concept of commerciality is under scrutiny and it is likely to challenge relief whenever the commercial basis is suspect.

Commercial woodlands are described as woodlands managed on a commercial basis with a view to the realisation of profit, but nowhere is there an explanation or definition of the word “commercial”.

Issues may arise where woodlands are sold and capital gains tax needs to be considered, or where woods are passed on after death and inheritance tax relief is claimed. A useful provision in the capital gains tax legislation is the relief for gifts of business assets. This would normally apply to a trade, profession or vocation but will include the occupation of woodlands managed on a commercial basis. For inheritance tax purposes, 100% business property relief may be available, but only if the woodlands have been managed on a commercial basis.

Many tax inspectors are unfamiliar with woodlands as businesses and assume that there will be a detailed business plan estimating figures of income and expenditure with management meetings each year and minutes being kept on file. If, for example, no income is received for several years, the assumption could be that this was a business not for gain and therefore one that lacks a commercial basis. It is sometimes difficult to convince a tax inspector that trees are not like wheat which must be harvested in a fairly short window. Sometimes a period of benign neglect is good treatment for woodland as over management could be considered uncommercial.

What is more, it is often the case that the price paid for a particular piece of woodland may exceed the underlying value of the land and the trees on it. Tax inspectors ought to be aware that this added value could be due to other factors such as sporting rights, amenity value, or even renewal energy uses. 

Woodlands and forestry activity have been excluded from income tax legislation for 25 years so many assume that they do not need to keep records and accounts. Our advice is that woodlands should be “managed”. Professional agents should liaise with owners regularly to show that the legal owner of the woodland is managing it on a commercial basis, just as they would other parts of their land.

If you wish your wood to be assessed as “commercial” you should:

• keep yearly accounts
• keep a separate bank account in the name of the woodland business
• have it managed by a professional forester or experienced woodland manager
• manage it in ways intended to produce profit
• show that the expenditure incurred is appropriate for a business
• join a grant scheme which mentions the importance of producing a saleable product rather than an increase in the amenity of the woodland
• ensure gentlemen’s agreements for a right to shoot are formalised to establish that the woodlands are not merely managed for shooting.