My client is in the process of selling woodland whose trees are being sold as ‘pending issuance units’ (PIUs). Will the value attributable to the woodland be exempt from Capital Gains Tax?

First, a little background…

The UK Woodland Carbon Code (WCC) is a government backed standard for woodland creation projects across the UK. It provides a framework for the sequestration of carbon dioxide from the atmosphere to help the UK achieve its targets for tackling climate change. At its core, the code provides an opportunity for landowners to grow trees that capture carbon dioxide from the atmosphere, track how much CO2 has been captured, and sell the trapped CO2 to investors in the form of ‘carbon credits’. Typically, investors will be large companies trying to reduce their carbon footprint and who want to be seen as environmentally conscious.

The amount of CO2 captured by such projects is regulated by the WCC using organisations accredited by the ‘UK Accreditation Service’ including ‘Organic Farmers and Growers’ (OF&G) and the ‘Soil Association’.

Once a project is validated, investors will be able to buy one of two types of carbon credits: ‘Pending Issuance Units’ (PIUs) or ‘Woodland Carbon Units’ (WCUs). Per the WCC’s website:

‘A Woodland Carbon Unit (WCU) is a tonne of CO2e that has been sequestered in a WCC-verified woodland. It has been independently verified, is guaranteed to be there, and can be used by companies to report against UK-based emissions or to use in claims of carbon neutrality or Net Zero emissions.

A Pending Issuance Unit (PIU) is effectively a ‘promise to deliver’ a Woodland Carbon Unit in the future, based on predicted sequestration. It is not ‘guaranteed’, and cannot be used to report against UK-based emissions until verified. However, it allows companies to plan to compensate for future UK-based emissions, or make credible CSR statements in support of woodland creation.’

The purchased carbon credits are then recorded on the UK Land Carbon Registry and are publicly viewable. This gives investors the opportunity to prove that they have actively taken steps to reduce their carbon footprint.

Naturally, most new projects will necessitate the sale of PIUs rather than WCUs since the newly planted trees will not sequester the required amounts of CO2 until they have matured.

Turning to Capital Gains Tax (CGT)…

TCGA 1992, s. 250, provides that where woodland is ‘managed by the occupier on a commercial basis and with a view to the realisation of profits’, proceeds from the sale of the trees from that woodland are exempt from Capital Gains Tax.

Prima facie, in most cases, the growth of woodland as part of a WCC project is likely to be carried on ‘with a view to the realisation of profits’ via the sale of PIUs or WCUs; otherwise, why would the owner bother to take part in the scheme? However, the legislation also specifies that the woodland needs to be ‘managed… on a commercial basis’. The legislation does not offer a definition of the latter phrase, and case law does not appear to aid us either.

However, taking the ordinary meanings of the words ‘managed’ and ‘commercial’ would suggest that there must be some degree of business organisation involved in addition to an intention to turn a profit. Compliance with the WCC requires a substantial amount of time and planning by the occupier of the woodland, both to obtain validation at the outset and verification of the sequestered CO2 in the future, as well as in the advertisement and sale of carbon credits to investors. The substantial degree of organisation required to be compliant with the WCC can be inferred from reading the published Woodland Carbon Code guidance (version 2.2, April 2022, as of the time of writing).

HMRC also appears to acknowledge this in their Inheritance Tax Manual at page IHTM25253:

‘HMRC is of the view that the activities necessary to create, manage, and maintain the land for the purposes of generating credits for use or sale will mean any business undertaking these operations will, in general, not be mainly involved in the holding or making of investments, as required by IHTA84/S105(3).’

Inheritance Tax (IHT)

For inheritance Tax purposes, HMRC’s opinion is that woodland complying with the WCC will, in general, not be mainly involved in the holding or making of investments. Per the result of Weston (executor of Weston deceased) v. IRC [2000] STC 1064, their opinion implies the activities required to manage the woodland will usually be at least 50% non-investment ‘in the round’. Hence, Business Property Relief (BPR) is likely to be available where the disposal of the woodland gives rise to a transfer of value. Of course, HMRC caveats their opinion by stating that the facts of each case will need to be considered when assessing the availability of BPR. And it’s worth bearing in mind, where the disposal is a sale at arm’s length, BPR is irrelevant as there will be no transfer of value for IHT at all.

Other practical points

  • At the time of writing, HMRC has not made a comment on whether they think TCGA 1992, s. 250, could be in scope for disposal of WCC compliant woodland. In cases of doubt, a taxpayer or their agent may be tempted to make a non-statutory clearance application. However, there needs to be a material uncertainty in the application of the legislation; HMRC will not provide clearance on matters of fact, such as whether certain activities constitute a business. Therefore, it seems unlikely that HMRC will provide clearance that woodland is ‘managed by the occupier on a commercial basis and with a view to the realisation of profits’, which is also a matter of fact.
  • If the disposal qualifies for the Capital Gains Tax (CGT) exemption at TCGA 1992, s. 250, it follows that the sale of PIUs and WCUs will be exempt from Income Tax and Corporation Tax (under ITTOIA 2005, s. 768, and CTA 2009, s. 980, respectively), since the conditions for the exemptions in each case are identical.
  • Only the value attributable to the trees and saleable underwood will be exempt from CGT under TCGA 1992, s 250. The value of the land itself will remain chargeable to CGT. Thus, where land and trees are sold together, it would be advisable to have a professional valuer provide an allocation of proceeds between the trees and land. This will aid a taxpayer if the computation is subject to scrutiny by HMRC. Of course, HMRC are going to be sceptical about any amount of proceeds that a taxpayer claims is attributable to the trees as opposed to land, since it’s in their interest to weight such an apportionment in favour of the trees. If the taxpayer wants to obtain further reassurance, they may consider requesting a Post Transaction Valuation Check (PTVC) from HMRC so that the valuation of each element can be agreed upon.

In conclusion, where the woodland is compliant with the WCC, the conditions at TCGA 1992, s. 250, are likely to be met such that the value of the trees in respect of the woodland will be exempt from Capital Gains Tax. However, each case should be considered on its own merits, especially with respect to how far the relevant project has progressed (e.g., has the WCC validated the project, have any PIUs or WCUs yet been sold, have the trees reached maturity, has sequestered CO2 been verified, etc.).

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