Woodlands, is it a sound investment?

Income Poor, Asset Rich

Profits from trees – We have searched the Internet and it’s not too difficult to find reports of investments in woodlands producing annual returns in double figures. Other forecasts suggest around 5% is more realistic. Nevertheless, this isn’t too shabby these days and when you add in the potential tax advantages it looks all the more appealing. But can your company take advantage of these?

Can companies invest?

Usually, the tax breaks offered by woodlands are associated with investments made by individuals. However, companies are allowed to invest and can benefit from some of the same tax advantages.

Corporation Tax breaks

Profits from selling harvested timber aren’t liable to Corporation Tax (CT). Plus, were your company to sell the woodlands and make a gain, the value of the standing or felled trees can be knocked off before you work out the amount chargeable to CT. This means only the gain made from the sale of the underlying land is taxed.
You have to watch out though as theprofit from timber sales is tax-free for a company, when the directors or shareholders draw it it’s likely to be in the form of dividends or salary. These are taxable and so in effect the tax-free status of the woodland income is lost.

Inheritance Tax break

Companies aren’t directly liable to Inheritance Tax (IHT) and so it’s easy to overlook that a corporate investment can be a useful IHT planning tool. Usually, IHT Business Property Relief (BPR) on the value of your company shares is restricted where it has investments such as bank deposits, bonds etc. This is because BPR only applies to trading assets, and investments don’t usually meet this requirement. An investment in commercially managed woodlands, i.e. those run with the intention of making a profit, count as a trading asset and so won’t cause a restriction in BPR.

Capital Gains Tax break

Woodland can be a good long term tax-saving strategy if eventually you intend to sell your company’s trade and other assets. Assuming your company is successful, it will normally have to pay CT on any gain it makes on, e.g. trading premises, goodwill etc.
By investing the proceeds into woodlands your company can claim rollover relief which will defer indefinitely the tax payable on gains from the sale of assets. The gain will become chargeable only when the woodlands are sold.
Investing via a syndicate or investment trust, rather than by a direct purchase of woodlands, still qualifies your company for the special tax breaks, but it’s more flexible. For example, it can more easily sell off the investment piecemeal and so control when tax is payable on a rolled over gain.