Taxation Status

What is the taxation status of a renewable energy investment? When the renewable energy investment is biomass or woodpellet's in this case. Then the Wood pellets are treated in the same way as a timber product and therefore fall under the same current tax legislation that applies to timber and forestry assets in the UK.

Income generated from commercial forestry is exempt from both income tax and corporation tax

The UK government introduced tax legislation to incentivise the growth and development of forestry and wood based products to encourage the development of the UK timber and forestry industry.

The driving force behind these generous tax breaks is a UK Government commitment to increase the forestry coverage from the current level of 11% to 17% in the UK by the year 2030. These tax breaks are to encourage land owners and private investors alike to plant and maintain commercial forests. The end result will be a higher percentage forestry coverage in the UK and a reduction in the CO2 emissions as a result of making the UK a more eco friendly environment.

From a Tax point of view Investment in commercial forestry and timber is currently subject to favourable taxation treatment in the UK. Under current UK tax law, there is no liability to income tax, corporation tax or capital gains tax (CGT) arising in relation to growing timber. As a consequence, the majority of the income arising in relation to a UK timber investment is anticipated to be free of tax.

Income Tax

Income arising from commercial forestry is exempt from both income tax and corporation tax. There is no tax payable on income generated from a timber crop or on the sale of an entire plantation

(Income Tax Act 2005, s11, s768)

The increase in the value of timber crop is exempt from capital gains tax

Capital Gains Tax

The increase in the value of growing timber crop is exempt from Capital Gains Tax (s250, Taxation of Capital Gains Act (TCGA) 1992).

Roll over Relief

Where a chargeable gain has arisen on the sale of a qualifying business asset, it is possible to benefit from roll-over relief from any CGT due by investing the sale proceeds into another qualifying business asset and thus defer the CGT due (s158(1)(b) TCGA 1992). The land element of a forestry crop investment is a qualifying business asset.

It can be possible to secure 100% roll-over relief by acquiring land for afforestation

All commercial forestry benefits from 100% IHT relief once held for two years

Inheritance Tax

Forestry which is managed commercially qualifies for 100% BPR once held for two years,

(Inheritance Tax Act 1984 (IHTA), s105 and s106 as amended by Sch 14 Finance (No.2) Act

1992). If held at death, there is no IHT payable on the total value of the investment including

both land and trees.

If the owner dies before completing the full two year qualifying period for 100% BPR:

  • If the forest is bequeathed to a spouse then the spouse’s two year qualifying period is treated as starting at the date of the original purchase of the forest (s108 IHTA 1984);

Or

  • On a bequest to any other person then any IHT due may be paid in ten annual instalments, interest free (s227 IHTA 1984).

Forestry offers considerable investment flexibility. Investments can be carefully targeted to meet set investment objectives. These include regular tax free income from mature and semi mature plantations, to capital growth over a given period of time to meet known future commitments. This can be achieved by acquiring the appropriate age class plantation. All of this can be accomplished within an environment which provides 100% IHT relief, allowing for flexibility in financial planning within a family.

The information contained in this document is intended as a general summary prepared in accordance with CX Renewable Energy Limited current understanding of UK tax laws and should be used only as a guide and does not constitute legal or tax advice. CX Renewable Energy DOES NOT PROVIDE TAXATION ADVICE. Prospective investors are advised to consult their own professional advisers in relation to the financial, legal, tax, National Insurance Contribution liabilities and other implications of investment in UK commercial timber/forestry which will vary in relation to their own particular circumstances. Prospective investors should be aware that, any change in the level and/or basis of taxation, in tax reliefs or in HMRC or Revenue Scotland practices, may adversely affect the value of UK timber/forestry investments and returns to investors.

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