Investing in forestry can be a very tax efficient option, but not as attractive as it once was for many reasons. Forests cover 11% of the land area in Ireland and provide about 12,000 jobs. Almost 50% of this forest area is owned by the private sector. About 21,000 farmers have planted land. Forestry is seen as one of the most important tools in addressing our nation’s carbon footprint.
Currently, there is a huge issue around the backlog for licences for afforestation, felling and road licences. These include private forest owners, mainly farmers, where a backlog of 1,980 applications has built up. This delays the felling and thinning of these woodlands.
The Department of Agriculture is responsible for issuing these licences. The supply of timber is affected but legislation introduced last year has helped reduce the number of appeals against forestry licences.
However, the issue has not been fully resolved. as the backlog remains high.
Investing in forestry is a long-term investment and requires careful consideration. The grant and premiums system, together with the tax-free income can be very attractive, but professional advice from a forester is necessary before committing your land to such a long-term plan.
Taxation in relation to private forestry
Profits or gains from forestry which is managed on a commercial basis with a view to making a profit is exempt from income tax and corporation tax. Universal Social Charge (USC) and PRSI are payable. Christmas trees are exempt but other decorative trees, bushes or shrubs generally are not.
Capital gains tax (CGT)
In the case of individuals, the value of the standing timber is not taken into account for CGT purposes. If an individual sells the woodlands, CGT is chargeable on the lands only, and not on the trees growing on the lands. Typically the underlying land will be of very little value due to the obligation to replant.
This can be less than the acquisition cost.
If selling afforested land, this is subject to stamp duty on the land value only and not the standing crop of trees.
Capital acquisitions tax (CAT)
CAT is another name for gift or inheritance tax. Woodlands that are inherited or gifted are liable to CAT but are eligible for agricultural relief (see below). The condition that the beneficiary spends at least 50% of their normal working time farming the holding for the purposes of maintaining eligibility for agricultural relief does not apply with forestry plantations.
What about inheritance tax on forestry?
Forestry can be inherited subject to valuation and the various tax threshold limits. It must be retained for two years before it can be sold on, according to Green Belt. It can be managed in the meantime such as harvesting the timber. Children who inherit forestry may be eligible for agricultural relief, which reduces the taxable value of the woodland by 90%, if they qualify as a farmer. For example, forestry valued at €2m would be reduced to €200,000 for inheritance tax purposes. To qualify as a farmer, 80% of each child’s assets must be in agriculture and forestry on valuation date.
There is a clawback on the agricultural relief where the beneficiaries cease to be farmers within six years of the inheritance.
Dear Money Mentor,
I own a large forestry planted fifteen years ago by my husband who died two years ago. I am in my late 60s. I have two adult sons who live abroad, who eventually will inherit my house and the forestry.
I am considering selling the forestry but I am wondering would that be the most tax efficient option. My sons are not farmers and I am not sure how much interest they would have in managing the forestry, or eventually the sale of the plantation.
I would appreciate any advice.
Siobhan (Co Cavan)
Money Mentor writes:
Thank you for your email.
You haven’t said how many acres are planted but in any case forestry is a very valuable tax efficient investment. Any profits or gains from forestry which is managed on a commercial basis with a view to making profit is exempt from income tax and corporation tax, but USC and PRSI are payable.
If you sell the forestry you will be liable for CGT, which will be chargeable on the lands only, not on the sale of the trees. CGT is charged at a rate of 33%.
If you leave the forestry in your will to your sons, CGT will not apply, but they will be liable for CAT at a rate of 33% on the value of the plantation they inherit. Under current tax law each child can receive €335,000 in inheritances and gifts from their parents during their lifetime before paying any CAT.
Your sons may be eligible for agricultural relief (or business relief) which reduces the taxable value of the forestry by 90%, if they qualify as a farmer.
This relief is well worth looking in to before you make your decision, so I suggest you get some professional tax advice, especially as your sons will be inheriting your home as well.
I wish you all the best in your decision making.