As of 1 April 2019 forestry will become fully devolved to the Scottish Parliament following the passing of the recent Forestry and Land Management (Scotland) Bill. The support provided for the forestry sector and integration with other existing land uses will be covered in the new Scottish Forestry Strategy being prepared by the Scottish Government.
Forestry is high up the agenda for the Scottish Government mainly due to climate change targets. It is estimated the Scottish forestry sector is worth over £1bn to the economy and supports over 25,000 jobs. Indeed the Scottish Government has committed to increase the annual tree planting target from 10,000 hectares per annum to 15,000 hectares per annum by 2025.
There are attractive funding incentives available to landowners which have been put in place to help achieve these ambitious targets. With these funding incentives the land can still qualify for Basic Payment. There is also a Timber Transport Fund of £7m, which seeks to support sustainable timber transport in Rural Scotland. This funding highlights a strong commitment being made from the Government to kick-start this sector. Other developments have also emerged through compliance with the Woodland Carbon Code which provides the opportunity for forestry owners to sell the rights of carbon captured by newly planted trees.
There has been a resurgence in the demand for wood used for wood burners and there continues to be ongoing investment in biomass technology that benefits from renewable heat incentive payments. This ensures that woodlands which were not financially worth being actively managed previously have become a possible income source for farmers.
Existing undermanaged woodlands could be brought back into production to produce an income stream for farmers. Farmers can use woodlands and forestry to diversify their financial risk as direct support for farming is likely to be reduced.
The benefits of commercial woodlands for flood mitigation, rural employment, shelter for livestock and carbon fixation are being increasingly championed and in general woodlands support overall biodiversity.
Timber prices have risen in the past few years and one factor of this is the drop in value of the sterling. The Government’s pledge to raise new housing supply will also boost the timber prices. The low interest rates has led investors to consider non cash, long term and low risk investments such as commercial forestry as alternative investments.
We have seen a rise in the number of discussions with clients about planting trees, felling trees, selling forestry land or buying land to create a forestry business and discussing the tax implications of forestry in general.
As a reminder the key tax points to consider are:
- It is generally advantageous to have the forestry business in a VAT registered entity.
- When buying and selling forestry land check if it has been opted for VAT purposes and consider the Land and Buildings Transaction Tax (LBTT) implications.
- Income realised through the sale of timber is exempt from income tax. Grants are tax free, with the exception of payments made in compensation for agricultural income foregone.
- There is no tax relief for losses or capital purchases.
- There is no capital gains tax liability on the gain in value of commercial tree crops. Any gain on disposal of the woodland is split between trees and land. The element relating to trees is tax free and the element relating to land is taxable.
- There is no inheritance tax on death if forestry is held for two years and commercially managed.
Forestry must be commercially managed when considering it as long term investment, perhaps as an Inheritance Tax (IHT) asset protection strategy. The forestry business should also have maintenance costs, a forestry management plan and either its own set of financial statements or its own enterprise accounts within a larger business to qualify for tax reliefs.
The combination of a number of factors has seen a renewed interest in commercial woodland operations. Actively managed commercial woodland on farms creates financial benefits when managed alongside the existing land uses. In addition, the benefits of woodland supporting overall biodiversity should not be ignored.
If you would like to discuss any of the points raised in this blog please contact me:
01738 441 888
The information in this blog should not be regarded as financial advice. This is based on our understanding in April 2018. Laws and tax rules may change in the future.