Would your business invest in woodlands to defer paying tax?

It’s claimed that investing in woodlands can produce a return on investment in excess of 5% per annum – not a bad yield when compared with the measly rates being paid by financial institutions in these days of low interest rates. I’m going to take a look here at how your company could benefit from such an investment.

Companies pay corporation tax on their profits and on gains made on the sale of assets (i.e. whereas an individual would pay capital gains tax (CGT) when selling assets. However, any profit made from selling harvested timber is not subject to corporation tax and, in the event that a company sells the woodlands and makes a gain, the value of standing or felled trees can be deducted when calculating the size of the gain subject to tax. Effectively, therefore, only the gain on the sale of the underlying land would be subject to corporation tax.

There are other good tax advantages in woodlands for companies looking at investing surplus cash. If a trading company builds up too much cash in its balance sheet or simply invests surplus cash in property or other ‘passive’ investments, there’s a danger that when the shareholders come to sell their shares in the company, the disposals won’t qualify for entrepreneur relief – and the shareholders will therefore end up paying 28% CGT on all of their gain instead of just 10% on the first £1m. When a company invests its surplus cash in commercially managed woodlands, where the intention is to trade at a profit, the investment counts as a trading asset, meaning that this problem won’t exist. The issue of a company having too many non-trading assets in its balance sheet (i.e. cash, property, etc.) also causes a problem for inheritance tax (IHT) purposes, in that these non-trading assets can prevent the 100% IHT relief that would otherwise have been available for shares in a trading company.

Here’s a nifty tip if your company is thinking of selling trading assets and incurring a gain that would be subject to corporation tax. I’m thinking here of a situation in which your company might sell one of its branches (no pun intended!) or divisions at a profit (goodwill, for example), leaving a cash surplus left over. If this cash is reinvested in woodlands, you can claim rollover relief on the gain, effectively deferring the payment of corporation tax on the gain until such time as the woodlands are sold in the future.

There’s some food for thought here; it won’t be for every company, that’s for sure, but there are enough tax advantages here to make it worth noting for the future, if not for now.

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David Elliott
David Elliott

Chartered Accountant, BSC, FCA

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