Investing in Woodlands to minimise tax
If you're sick of the low returns offered by traditional tax efficient investments such as ISA's and the defunct PEP's you won't be alone.
Of course you could always try a VCT or EIS investment, but if you're looking for something a little different and like the idea of being environmentally friendly you could consider buying some fields.
Yes, you heard me right - I'm basically talking about investing money into fields, although to give it the correct name it's called woodland.
When you buy woodland you're basically buying a piece of the countryside. So, we're looking at rivers, meadows, copses, woods, forests and the like.
You can buy decent sized plots from £10K upwards, and as well as being a potentially good long term investment it's particularly useful for city dwellers who want to have somewhere to go and enjoy the great outdoors.
Recent years have shown some pretty good returns on forestry woodland in particular and given the tax breaks you'd be looking at annual returns of 8-10% for a higher rate taxpayer.
What benefits are there?
The main benefit is in terms of UK Inheritance Tax ('IHT'). UK woodland can qualify for 100% business property relief once you have owned it for more than 2 years. This includes the value of the land and the trees.
This means that the value of the entire investment could be eliminated from your estate in a similar way to shares in unquoted trading companies can be.
In addition as death is not a chargeable occasion for capital gains tax ('CGT') purposes any gains rolled over (see below) against the woodland acquisition would also be eliminated.
In terms of CGT if you were to sell any of the trees or timber the profits made would be completely free of CGT. However, the increase in the value of the land is liable to CGT.
A great advantage of woodland purchases is also the opportunity to "roll over" any CGT liability that you may have against the purchase of the woodlands. Again, in a similar way to EIS investments.
If you take your woodland seriously and eventually develop a trade you'll also be pleased to note there is no income tax (or corporation tax if you used a company to hold the woodland).
Once you've got your woodland the obvious question is what you do with it. There are a number of possibilities but the main ones are:
- Do nothing and simply hold it as an investment
- Use it yourself eg for camping or the occasional caravaning trip
- Set it up as an eco zone/conservation area and clean streams, feed birds etc
- Look to generate an annual income from it. One of the ways you could do this would be to get some qualifying farmland and plant the land with trees under the Farm Woodland Premium Scheme (FWPS). This will hopefully generate a significant financial yield, an annual income and relief of all Inheritance Tax. The annual income is effectively an annual payment based on the size of the land.
On the subject of grants, you could also qualify for a 'woodland grant'. This is given to encourage the creation of new woodlands and the management of existing woodlands by providing money towards the cost of the work involved. So the actual cost of your investment could be subsidised by the state.
Need more benefits? Well it's also a low risk investment and you have the benefit of knowing your investing in a tangible asset. Soft wood timber in particular is forecast as a good long term investment.
Finally, its a highly liquid asset, with a ready market and no tie ins - so you could sell up when you wanted.
On the downside to Woodland investments, they can be pretty complex if you're not familiar with this area. Don't imagine that you could build yourself a holiday home in the middle of your forest either. Only buildings deemed 'reasonably necessary' for the purposes of building are allowed to be erected.
You could however put up to three caravans there if your holding exceeds five acres provided you don't occupy them for more than approximately one month pa.
So if you're into caravaning holidays the woodland investment could be perfect on all fronts! If not it's certainly worth bearing in mind as a home for some long term investment cash, due to the IHT and other tax benefits.
About the Author
The Author of this article is our site Editor, Lee Hadnum. Lee is a rarity among tax advisers having both legal and chartered accountant qualifications. After qualifying a prize winner in the Institute of Chartered Accountants exams, he also went on to become a chartered tax adviser (CTA).
He worked in Ernst & Youngs Entrepreneurial Services department for a number of years before setting up his own tax planning practice. He is now a full time tax author.
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