Woodlands have long enjoyed a generally more favourable tax treatment than other land use forms. As farmers and landowners look to offset some of the effects of recent tax changes, could woodlands be worth another look?
What income can be generated from trees and woodland?
The production and sale of timber is perhaps the most obvious way of generating income from woodland, whether through tree-felling, short-rotation coppice, or even Christmas Tree sales. However, as the carbon storage, biodiversity, recreational and other benefits of woodland are becoming increasingly valued, new income sources are also opening up.
Farming subsidies are now more environmentally focused, with tree-planting and agro-forestry amongst the activities being incentivised. There is also some more specific grant funding, such as the England Woodland Creation Offer (EWCO).
Woodlands can also now be used to generate income from the sale of carbon and other ecosystem service units, such as the Woodland Carbon Code. Under this code, carbon units, which are based on the tonnes of carbon dioxide sequestered, can be sold as early as 5 years after planting.
Woodlands also offer numerous revenue-generating recreation opportunities, including glamping, forest schools and cycle trails, with some grant schemes such as the EWCO offering additional stacked payments for public access.
So, how would these various income sources be treated for income tax, and what is the capital taxes position?
Income Tax
Woodlands managed on a commercial basis and with a view to making profits are outside the scope of both Income Tax and Corporation Tax. This means that profits arising from commercially managed woodlands are tax free. This includes woodlands signed up to the Woodland Carbon Code.
It does, however, also mean that there is no tax relief available if there are losses, and expenditure on plant and machinery for use in commercial woodlands is not eligible for Capital Allowances.
If there are other activities taking place within the woodland, such as recreational activities, the profits from these activities would still be taxable.
It should also be noted that the cultivation of short rotation coppice is classed as farming, and not woodland, for Income Tax and Corporation Tax purposes and so any profits would be taxable.
The tax position for woodland grants is quite complex. Woodland grants are generally not taxable, but if the grants could be considered to be a substitute for farming income, such as where there is a change of land use to forestry, these would be taxable.
Capital Gains Tax
Profits from the sale of trees in commercial woodlands are exempt from Capital Gains Tax (CGT), whether the trees are standing or have been felled. A growing timber crop (but not the land it grows on) is also exempt from CGT, where managed as a commercial investment. This CGT exemption for the trees also applies to woodland managed under the Woodland Carbon Code.
Where the woodland is being managed as a business, or where a recreational business is being operated within the woodland, any gains in value of the land may benefit from the CGT reliefs available for businesses, such as Business Asset Disposal Relief (BADR), rollover relief and gift holdover relief.
Inheritance Tax
There are various Inheritance Tax (IHT) reliefs which may be available, depending on the nature of the woodland.
For areas of agro-forestry and for amenity woodland, where the woodland is ancillary to agricultural land or pasture, Agricultural Property Relief (APR) may be available. APR may also be available for areas of short-rotation coppice.
APR would not be available on commercial woodlands, but these may qualify for Business Property Relief (BPR) if the woodlands are being actively used in a business. This business can include the generating of credits under the Woodland Carbon Code.
APR and BPR operate in a similar way, in that assets which qualify for 100% relief are not charged to IHT. From 6 April 2026 however, 100% APR and BPR will be limited to the first £1m of qualifying assets per person, with 50% relief applying above that threshold.
This restriction may mean that some of the IHT reliefs more particular to woodlands could potentially become more valuable.
If the woodland does not qualify for APR or BPR but the trees or underwood are growing, Woodlands Relief may be available. Where the appropriate election is made, the value of the trees or underwood (but not the land itself) is excluded from the value of a deceased’s estate. IHT is instead paid when the trees are sold, given away, or otherwise disposed of.
Alternatively, depending on the woodland’s scientific, scenic or historic value, some areas of ancient semi-natural woodlands may qualify for the Conditional Exemption Tax Incentive Scheme and be exempt from IHT (and CGT) as long as the qualifying criteria are maintained, including providing reasonable public access.
Unlike APR and BPR, both Woodlands Relief and the Conditional Exemption Tax Incentive Scheme can be more of a deferral of IHT rather than a full relief, so professional advice should always be taken before any elections are made.
Summary
The tax position for woodlands is complex and varies depending on the nature of the woodland and the use to which it is being put, so professional advice should always be taken.
There are, however, some potentially useful tax reliefs available. When combined with the developing carbon and ecosystem services markets, as well as grant funding and subsidies aimed at encouraging more areas of tree planting, woodlands may be worth that second look.
If you want further details on these points or want to discuss your position and options, please contact us at BHP.
