Planting and growing trees has historically been a venture associated with tax advantages in the UK, long before its recent renaissance as a means of capturing carbon and producing sustainable raw materials.

But now, with ambitious woodland expansion targets in place, alongside a range of grants and incentives at different scales, some clarity is needed about what planting does – and does not – qualify for tax breaks in the eyes of HMRC.

According to Saffery Champness partner Jenny Healy, the most important test in determining whether a tax advantage can be gained from planting trees is in establishing that they are commercial – in other words managed with a view to profit.

Read more: Woodland cover increases 41% at Beinn Eighe

“It is important to show that any new woodland creation is to make profit at some point in its own right and not for other reasons, for example to enhance a shoot, to promote biodiversity, or to do more in the fight against climate change," said Ms Healy, who suggested that evidence of commercial intent could take a number of forms – minutes of meetings; preparation of annual budgets; active management, such as the employment of a professional forester; a separate bank account, VAT registration and separate P & L in the annual accounts.

with that established, the main areas where commercial woodland can offer a tax advantage are in relation to Income Tax, Capital Gains Tax and Inheritance Tax.

With regard to income tax, if woodland passes the commercial test then profits from the sale of timber are not liable to tax, but the converse is that no loss relief is allowable against other income. There are exceptions, such as Christmas trees, which are usually grown as a crop and fall within the statutory definition of market gardening, so profits from this business remain taxable.

In terms of IHT, provided the commercial test has been passed, woodland should attract 100% relief via Business Property Relief, although it should be noted that land switched out of agriculture will no longer qualify for Agricultural Property Relief unless it is ancillary to farmland and the shelter belt criteria are met.

In the event that neither BPR or APR apply, then the Deferral Relief Scheme (Woodland Relief) may, meaning that IHT on the timber value is deferred until after the timber is either felled or sold.

Read more: Natural regeneration of native woodland needs some help from farmers and landowners

A sale of land and the crop together attracts Capital Gains Tax on the land element only, which is often a low element of the whole. Succession planning measures such as gifts of commercial woodland attract CGT holdover relief and are IHT free based on the BPR. Certain carbon offset payments are also capable of being regarded as part of the occupation of the woodland and income tax free.

Ms Healy added: “Woodland, where there is evidence to prove that it is commercial, continues to remain attractive both in terms of tax advantages and available grant funding. The respective Governments in England, Scotland and Wales are committed to protecting existing woodland, vigorously promoting new planting and working with landowners, farmers and others to increase the amount of it actively managed in the UK. The current tax regime supports those objectives and encourages their delivery but, as always, it is a complex area and professional advice should be sought.”