Question: I have a number of acres which have been idle for the past few years, and I’ve been toying with the idea of using them to plant forestry.
It would be a nice way to provide some additional income for the farm, but I don’t really know much about the incentives available, or if there are any consequences from a tax and legal perspective. Is it worth the upfront investment?
Answer: Going down the forestry
path over the last few years has been a bumpy road. There are certainly tax advantages, but non-tax issues that have arisen need serious
consideration.
Tax implications
One of the most appealing aspects of forestry investment is its favourable tax treatment. Forestry income is exempt from Income Tax and Corporation Tax. However, it’s important to note that PRSI and USC are still applicable on income from forestry.
Navigating tax considerations
When venturing into forestry investment, it’s essential to understand the various tax implications:
Revenue Construction Tax (RCT) Rates: It is likely that you will need to hire subcontractors for certain activities. When you engage a subcontractor, you will need to register with Revenue as a principal contractor and deduct Relevant Contracts Tax (RCT) from your subcontractor. The RCT rate that applies will depend on your subcontractor’s tax compliance record. There are three potential rates:0% for subcontractors with an up-to-date tax compliance record20% for subcontractors with a substantially up-to-date tax compliance record35% for subcontractors with a poor tax compliance record or for those who have not registered with Revenue. Profits from standing timber are exempt from Capital Gains Tax, so if you sell land with timber standing on it, the gain from the timber is exempt, but any gain on the land will be liable (this exemption doesn’t apply to companies.)Stamp Duty: Sales and transfers of land are liable for stamp duty. However, the trees growing on commercial woodland are exempt, provided that the woodland occupies a substantial part of the land (not less than 75%) and is managed on a commercial basis. This means that any sale of forested land has to be apportioned for stamp duty as the land is liable but the crop is not.Agricultural Relief and Business Relief: Should you pass on the forestry land via inheritance or gift, the recipient may qualify for Agricultural Relief. This is a substantial relief which reduces the taxable value of agricultural property by 90% for Capital Acquisitions Tax purposes. The usual requirement to pass the ‘farmer test’ does not apply to property that consists solely of trees and underwood.Value Added Tax (VAT): There is no requirement to register for VAT for RCT if the reason for being within the RCT net is forestry. If you are not registered for VAT and if you sell to someone who is a registerer for VAT, then a flat addition of 4.8% will be added. Non-VAT registered farmers can use the VAT 58 form on certain fixed capital costs, such as fencing and roadways (but not planting).
If you are VAT-registered, you must charge standard VAT at 23% on timber sales apart from firewood, which is chargeable at 13.5%.Other considerations
Despite the positives from an income and tax perspective outlined above, the targets for the amount of afforestation in Ireland have fallen well short of expectation over the last number of years.
In 2023, 1,651 hectares of forestry were set in Ireland – this is well short of the targeted amount of 8,000 hectares per year as specified in Ireland’s climate plans and significantly less than in the past where for example in 2007, almost 7,000 hectares were planted.
Reasons for low uptake
Issues with Planting Licences: The process of receiving permission to plant has become cumbersome, with multiple conditions now attached to new licences. Further, there are now restrictions on the types of land forestry can be planted on, and lands that farmers may have seen as suitable for forestry in the past (peaty-type soils) may now not be deemed suitable for planting.Issues with Felling and Road Licences: While the large backlog experienced over the last number of years is now reducing, significant additional costs, such as Environmental Impact Statements and traffic studies, are required before any granting of a felling or a road licence.Requirement to replant: Under legislation, once land enters forestry, it must remain in forestry after 30 years. When a coniferous forest is ready for harvesting, this must be replanted, and the landowner cannot put the land into another crop. This requirement is something a farmer should consider before planting their land. These issues have meant negativity has built up in the sector, with farmers who would have previously planted land not planting any further land and those who may have considered planting now looking at alternatives.Find the legal advice for this week's query here.
Tax Benefits: Forestry income
is free from Income and Corporation Tax, though PRSI
and USC still apply.Regulation Challenges: Obtaining planting and felling licences is complex, with many conditions and required studies.Long-term Commitment: Forestry is a long-term investment. Replanting is mandatory, meaning land used for forestry must stay as forestry.Marty Murphy is Head of Tax at Ifac, which is the professional services firm for farming, food and agribusinesses.
Read more
Evaluating the tax advantages of incorporating your farm business
Late start on college savings? Here’s how to catch up quickly
Question: I have a number of acres which have been idle for the past few years, and I’ve been toying with the idea of using them to plant forestry.
It would be a nice way to provide some additional income for the farm, but I don’t really know much about the incentives available, or if there are any consequences from a tax and legal perspective. Is it worth the upfront investment?
Answer: Going down the forestry
path over the last few years has been a bumpy road. There are certainly tax advantages, but non-tax issues that have arisen need serious
consideration.
Tax implications
One of the most appealing aspects of forestry investment is its favourable tax treatment. Forestry income is exempt from Income Tax and Corporation Tax. However, it’s important to note that PRSI and USC are still applicable on income from forestry.
Navigating tax considerations
When venturing into forestry investment, it’s essential to understand the various tax implications:
Revenue Construction Tax (RCT) Rates: It is likely that you will need to hire subcontractors for certain activities. When you engage a subcontractor, you will need to register with Revenue as a principal contractor and deduct Relevant Contracts Tax (RCT) from your subcontractor. The RCT rate that applies will depend on your subcontractor’s tax compliance record. There are three potential rates:0% for subcontractors with an up-to-date tax compliance record20% for subcontractors with a substantially up-to-date tax compliance record35% for subcontractors with a poor tax compliance record or for those who have not registered with Revenue. Profits from standing timber are exempt from Capital Gains Tax, so if you sell land with timber standing on it, the gain from the timber is exempt, but any gain on the land will be liable (this exemption doesn’t apply to companies.)Stamp Duty: Sales and transfers of land are liable for stamp duty. However, the trees growing on commercial woodland are exempt, provided that the woodland occupies a substantial part of the land (not less than 75%) and is managed on a commercial basis. This means that any sale of forested land has to be apportioned for stamp duty as the land is liable but the crop is not.Agricultural Relief and Business Relief: Should you pass on the forestry land via inheritance or gift, the recipient may qualify for Agricultural Relief. This is a substantial relief which reduces the taxable value of agricultural property by 90% for Capital Acquisitions Tax purposes. The usual requirement to pass the ‘farmer test’ does not apply to property that consists solely of trees and underwood.Value Added Tax (VAT): There is no requirement to register for VAT for RCT if the reason for being within the RCT net is forestry. If you are not registered for VAT and if you sell to someone who is a registerer for VAT, then a flat addition of 4.8% will be added. Non-VAT registered farmers can use the VAT 58 form on certain fixed capital costs, such as fencing and roadways (but not planting).
If you are VAT-registered, you must charge standard VAT at 23% on timber sales apart from firewood, which is chargeable at 13.5%.Other considerations
Despite the positives from an income and tax perspective outlined above, the targets for the amount of afforestation in Ireland have fallen well short of expectation over the last number of years.
In 2023, 1,651 hectares of forestry were set in Ireland – this is well short of the targeted amount of 8,000 hectares per year as specified in Ireland’s climate plans and significantly less than in the past where for example in 2007, almost 7,000 hectares were planted.
Reasons for low uptake
Issues with Planting Licences: The process of receiving permission to plant has become cumbersome, with multiple conditions now attached to new licences. Further, there are now restrictions on the types of land forestry can be planted on, and lands that farmers may have seen as suitable for forestry in the past (peaty-type soils) may now not be deemed suitable for planting.Issues with Felling and Road Licences: While the large backlog experienced over the last number of years is now reducing, significant additional costs, such as Environmental Impact Statements and traffic studies, are required before any granting of a felling or a road licence.Requirement to replant: Under legislation, once land enters forestry, it must remain in forestry after 30 years. When a coniferous forest is ready for harvesting, this must be replanted, and the landowner cannot put the land into another crop. This requirement is something a farmer should consider before planting their land. These issues have meant negativity has built up in the sector, with farmers who would have previously planted land not planting any further land and those who may have considered planting now looking at alternatives.
Find the legal advice for this week's query here.
Tax Benefits: Forestry income
is free from Income and Corporation Tax, though PRSI
and USC still apply.Regulation Challenges: Obtaining planting and felling licences is complex, with many conditions and required studies.Long-term Commitment: Forestry is a long-term investment. Replanting is mandatory, meaning land used for forestry must stay as forestry.Marty Murphy is Head of Tax at Ifac, which is the professional services firm for farming, food and agribusinesses.
Read more
Evaluating the tax advantages of incorporating your farm business
Late start on college savings? Here’s how to catch up quickly
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