Money grows on trees

According to the Forestry Commission, over 80,000 people in England alone own an area of woodland. It may be part of a working farm or estate, a shelter belt, cover area or just a place to visit and enjoy. There is something appealing about a wooded area in all the changing seasons. But there is more. Whether it has been family owned for a generation, or is a new acquisition, an important attribute of woodland and forestry is the opportunity it presents for management and development of the woodland; the grants available and the benefits which may flow from an enhanced income stream or an improving capital investment.

Investment in new woodland of course depends on the funds available and the period of investment. It is not a short-term option. Softwood cycles are typically 35 years and over. England and Wales remain net importers of wood and wood products. Most commercial woodland in Great Britain is softwood '“ spruce and similar. Used in the construction industry or for fencing, for paper or wood pulp/chip products, it grows better in areas of high rainfall and so is more prevalent in the north and on areas of high land.

However, when developing or looking for opportunities in relation to mixed woodland, the uses for hardwood and coppice should not be forgotten in building, furniture and fencing. In some wetter areas or margins, but those with easy access, 'cricket bat' willows are a possibility. Christmas trees are, of course, a shorter cycle crop but profitable if grown in the right areas, with proper management and easy access to markets.

An up-and-coming hardwood is walnut, which is grown on sheltered areas and is not prone to water-logging. French hybrids are more resilient to disease and can be harvested in less than half of the usual 55 to 90-year cycle; and the crop is proving to be of high value.

Softwood reached peak prices in the mid to late 1990s. Following a downturn, prices have improved in part because of the need for timber in areas such as China where they were rapidly growing. In recent times, mixed woodland in sought-after areas has been selling for as much as £6,500 to £8,500 per acre, and more when a special purchaser has been involved. Typically, however, sales of woodland blocks with reasonable access, location, age and structure have been exchanging from anywhere between £3,500 and £5,500 per acre.

Grants

There are grants available for woodland or forestry management. The Forestry Commission manages the English Woodland Grant Scheme, with funding throughout the English regions. In areas of central England (Derbyshire, Staffordshire and Leicestershire) which fall within the National Forest area, there may be grants and assistance with management of the woodland and development of access and other amenities from the National Forest project. Natural England also provides funding through its Environmental Stewardship Schemes and for projects such as the provision of short rotation coppice as part of the biomass initiative.

'Biomass' in this context is the use of fast-growing willow or poplar hybrids for their bulk '“ or biomass. The two to six-year growing cycle produces wood used for energy production, plus garden mulch and poultry litter. However, aside from virgin trees, chips, pulp or dust (being the by-products from production of other timber products) are also being used in the new electricity generating plants.

There are also various initiatives, at present within the Rural Development Programme and on a regional basis, to encourage the growing and use of woodfuel products and the development of the supply chain. This is geared towards domestic and office-type heating production as an adjunct to regional electricity generation. There are also capital grants from the Department of Energy and Climate Change or loans (from the Carbon Trust) available for the installation of woodfuel boilers.

Apart from short rotation coppice, woodfuel includes the use of previously under-managed woodland, and traditional coppice together with other low-value wood and thinnings.

Carbon offsetting

There is of course the business of carbon emissions, together with an unresolved debate about whether tree planting can really equate to carbon offset. Clearly, the trees have to continue to grow '“ as soon as they are felled, the carbon they are effectively storing is released. Some organisations have already sponsored or set up projects to create carbon credits which can then be offset against individual corporate emissions. There were schemes to fund tree planting as part of carbon offset schemes. However, most of these for the moment are no longer looking for European projects nor providing grants for reforestation, though some will still look for opportunities for individual tree planting. Those providing carbon offset schemes presently look not only to carbon reduction but also to the improvement of the health and welfare of people living in the vicinity of the scheme. The favoured projects are presently in Asia, Africa and South America.

Tax advantages

The tax advantages of timber are one of the key opportunities presented to a woodland owner or investor.

For tax purposes, there is a clear distinction between long-term and short-term projects. Long-term projects include any projects where the trees are harvested at intervals of ten years or longer, whereas short-term projects (including short rotation coppice), are those planted at high density, the stems of which are harvested above ground level at intervals of less than ten years (section 154(3) of the Finance Act 1995). The distinction is that short-term projects are regarded as 'farming' for tax purposes rather than 'forestry'. There may be an argument that short-term coppice or energy crops qualify as research and development.

There is no statutory definition of 'woodlands' (which is treated as synonymous with forestry). However, following the ruling in Jaggers (t/a Shide Trees) v Ellis (Inspector of Taxes) [1997] STC 1417 it is suggested that it must be a sizeable area of land which is significantly covered by growing trees of some maturity, height and size. In Jaggers, an area of approximately nine acres was planted with young coniferous trees which were sold directly to the public as Christmas trees. The court held that the trees had neither the height nor maturity that a person would associate with a wood. Further, it was held that the trees resembled bushes rather than trees and gave an overall impression of a nursery rather than a wood. In this case, the taxpayer was liable for income tax as a farmer.

Specialist Christmas tree farms are nurseries, and so fall under the definition of 'market gardening' for the purposes of tax. Where poor quality Christmas trees are produced by selling the tops of felled trees from commercial woodlands or the thinnings of land being prepared for forestry, these profits will be covered by the woodland exemption.

Commercially managed long-term woodland projects can be passed on free of inheritance tax as a result of the application of business property relief, and any rise in the value of the trees is free from capital gains tax. Such assets should qualify for capital gains tax rollover relief (you can reinvest capital gains from the sale of a business asset into forestry).

Income derived from commercial woodland is free of income and corporation tax (section 53(4) of the Income and Corporation Taxes Act 1988 as amended by section 65, schedule 6, paragraph 6(7) of the Finance Act 1988). When calculating the chargeable gains and losses on the disposition of land, the value attributable to the trees and saleable underwood is excluded (section 250(4)-(6) of the Taxation of Chargeable Gains Act 1992), CGT being payable only on the increase in value of the land and not the trees on it.

Harvesting and other business uses

Qualification for these reliefs means evidence of regular and planned management and an intention to harvest. As a general rule of thumb, if the taxpayer has received payments under the Woodland Grant Scheme, the exemption will apply.

It may be difficult to show an intention to harvest, particularly if the area is small, protected or ancient woodland. However, thought could be given to other 'business' uses: from paintballing to part of a commercial shoot, from a high ropes course to an amenity area, which may help with business property relief even it fails to be adjudged commercial woodland.

Income arising from other sources which involves the use of the woodland, of course, remains subject to income or corporation tax. Payments received under certain grant schemes in respect of woodland may also be taxable, such as the annual payments under the Farm Woodland Premium Scheme on the basis these payments are compensation for lost revenue.

On inheritance tax, woodlands relief should apply to commercial woodland held on death. On death, the person who would be liable to pay the IHT can elect to have the value of the trees and saleable underwood excluded from the deceased's estate. If the timber is later disposed of, its value at the time of disposal will be subject to IHT.

Relief is available if an election is made within two years of the death and the deceased was the beneficial owner of the woodland for a period of at least five years immediately preceding their death, or became beneficially entitled by gift or inheritance. Bear in mind it is not available for an outright lifetime transfer, a transfer by a close company, woodlands held on discretionary trust or woodlands on agricultural property. It is, however, available for partnerships provided the deceased partner has beneficially held the woodland for the qualifying period.

Woodland provides a tax-efficient investment vehicle, if properly managed, so increasing the potential return. The opportunities for support funding are many. More importantly, while not all carrying the most effective tax advantages, there are possibilities for most types of land, some of which might not otherwise be productive or as attractive for amenity or leisure.