Cash in on woodland tax relief incentives
Managing forestry so that you maximise the benefits
There are certain tax incentives in place where the managing of forestry or woodlands is carried out on a commercial basis, namely an income tax exemption on profits arising from forestry operations, a capital gains tax exemption on the sale of timber and a partial stamp duty relief on any forestry land.
Income Tax Exemption
Profits or gains arising from the occupation of woodlands managed on a commercial basis, and with a view to the realisation of profits, are not to be taken into account for any purpose of the tax acts.
The tax-free status of income is further preserved when dividends from companies are paid out of such exempted income.
Losses incurred in the occupation of woodlands managed on a commercial basis with a view to the realisation of profits may not be used to shelter a person’s other income from tax. Any profits,gains or losses arising from forestry activities must be included in the taxpayer’s annual return of income, even though the income or gains are exempt from tax.
The normal rules relating to the keeping of records and the making available of such records for inspection by the Revenue also apply.
Tax relief in respect of income from forestry is restricted in the context of the limitation on the amount of certain reliefs used by certain high-income individuals. Broadly, where a person is a high-income individual, they are restricted in the extent to which ‘specified reliefs’ can be applied to reduce the individual’s tax bill. The provision works so that the ‘specified reliefs’ used in any one year are limited to 20pc of the individual’s ‘adjusted income’. If a person has other income, then the amount of the forestry exemption will be limited to the greater of €80,000 and 20pc of the total income. However, if your total income is under €125,000, the forestry income will not be caught by the high-income earners’ restriction.
Capital Gains Tax (CGT)
Capital gains arising on the sale of standing timber is exempt from CGT in the hands of the individual. The relief does not apply to companies, or other bodies of persons. Where land is sold with standing timber on it, the proceeds must be apportioned and the part of the proceeds referable to standing timber excluded from the computation in relation to the disposal of the land.
Capital Acquisitions Tax
Gifts or inheritances of woodlands within Ireland can qualify for agricultural relief. Agricultural relief is a relief from CAT and takes the form of a flat rate 90pc reduction in the market value of all agricultural property comprised in a gift or inheritance, provided that the donee meets the ‘farmer test’ so that 80pc of the donee’s assets consist — after taking the relevant gift or inheritance — of agricultural property.
Trees and underwood growing on the agricultural land in question are specifically included in the definition of agricultural property, provided that they are growing on the land.
Crops or trees that have been harvested or cut down would not therefore qualify for relief. The timing of gifts or inheritances to take account of harvesting of valuable crops or felling of significant tracts of forestry should therefore be considered if passing onto the next generation.
Stamp duty on Forestry
There is a partial relief from stamp duty in respect of certain instruments relating to the sale or lease of land on which ‘trees’ are growing.
The partial relief is given by providing that the value of any trees growing on the land at the time the land is sold or leased will not be taken into account if:
- The trees are being managed on a commercial basis with a view to making a profit;
- The trees are growing on a substantial part of the land;
- The instrument contains a certificate to such effect.
There are numerous tax incentives in place where managing of forestry or woodlands is carried out on a commercial basis. It is worth reviewing the tax consequences of any transactions undertaken with your accountant or tax adviser to ensure that all reliefs are being availed of and that all the necessary documentation is in place.
Mark Doyle is a tax director at Grant Thornton