Almost half of the farmers who participated in this year’s Irish Farm Survey expressed concern about the future viability of their business.
For those seeking to diversify their income, planting trees can be a good option as profits from forestry are well ahead of sectors such as beef and there are valuable tax incentives to avail of. Forestry also plays an important role in tackling climate change as, in Ireland, young trees grow rapidly, absorbing carbon dioxide and releasing oxygen back into the atmosphere.
Subject to satisfying certain conditions, profits earned by landowners from woodland managed on a commercial basis are exempt from Income Tax and Corporation Tax (but not USC and PRSI). The exemption applies to profits from the sale of trees, whether standing or felled, and whether cut up or not. Note, however, that as these profits are exempt from Income Tax, any losses incurred when woodland expenses are deducted cannot be offset against other income for tax purposes.
Capital Gains Tax
When an individual farmer disposes of land, gains from the sale of trees growing on the land are exempt from Capital Gains Tax, however gains on the land are itself subject to CGT. The exemption does not apply to companies.
Similar to CGT, while sales and transfers of land are liable to Stamp Duty, the trees growing on commercial woodland are exempt provided that the woodland occupies at least 75% of the land and is managed on a commercial basis. Sales of forested land must therefore be apportioned for Stamp Duty purposes.
Capital Acquisitions Tax
This tax applies to gifts and inheritances. You can receive gifts and inheritances taxfree up to a set value over your lifetime. However, once you exceed the threshold, CAT is charged at 33%. If you inherit or receive a gift of agricultural property, you may be able to claim Agricultural Relief which reduces the taxable value of agricultural property by 90% for CAT purposes. Agricultural property is defined as agricultural land, pasture and woodlands situated in an EU member state and the crops, trees and underwood growing on such land. To claim agricultural relief, you usually have to pass Revenue’s ‘farmer test’, however this may not apply if the agricultural property consists solely of trees and underwood. Revenue will take into account whether the woodlands are operated on commercial basis when deciding whether the relief is due. There may be a need to apportion the value of the gift/inheritance between the growing trees and the land. Agricultural relief can be clawed back if you sell within six years of receiving the gift or inheritance or if you no longer meet the conditions for the relief. While the clawback provisions do not apply to trees or underwood, they do apply to the land on which the trees are growing. If you do not qualify for Agricultural Relief, you may be able to claim Business Relief where forestry is managed on a commercial basis. Again, this reduces the taxable value of relevant business property by 90%.
Other tax considerations
Two other important tax considerations for forestry farmers are VAT and Relevant Contract Tax.
• VAT: Forestry is considered a farming activity for VAT purposes. Farmers who are not registered for VAT, must apply the 5.4% VAT addition when selling timber to VAT registered traders and can claim the 5.4% flat-rate refund on certain fixed capital costs, such as fencing and roadways (but not planting). This is an important point to keep in mind when agreeing a price with timber merchants. VAT-registered farmers must charge VAT at 23% on timber sales other than fire wood where the VAT rate is 13.%.
• Relevant Contracts Tax: This withholding tax applies to payments by principal contractors to subcontractors. A farmer who engages a forestry subcontractor must register with Revenue as a principal contractor and deduct tax from the subcontractor. The relevant deduction can be 0%, 20% or 35% depending on the subcontractor’s tax status.
To read our full Irish Farm Report 2020 click here, or alternatively for more information and/or advice on the business and tax implications of diversifying into forestry, contact your local ifac office.