Woodland Carbon Units: Green, Tax-Free Income

30 August 2022 - Chris George

Tax Advisory Director Chris George has some good news for farmers and landowners thinking about creating new woodland.

Every farm and estate has that one area of land that no matter what you try, never produces a yield worthy of the amount of time and effort spent on cropping it. Whether it is because access is difficult, or it is an irregular shape, despite all of your best efforts, the results fail in comparison to the rest of your farming activities. Perhaps it is worth therefore considering something different. A solution that utilises the land effectively, produces a tax-free income stream and benefits the environment all at the same time.

Creating a new woodland which meets the  standards of the Woodland Carbon Code, will allow the landowner to issue Woodland Carbon Units (WCUs) and Pending Issuance Units (PIUs). These units represent the amount of carbon that will be absorbed by the planted trees during their lifetime. With an increasing number of businesses and government organisations pledging to be net carbon neutral in the near future, many of them need a method whereby they can offset their own
carbon emissions. As a result, the number of organisations in the market to purchase WCUs and PIUs is quickly rising.

Typically, a new native woodland captures between 300-400 tonnes of CO2 per hectare by year 50 and 400-500 tonnes by year 100. Recent sales of UK Woodland Carbon Units have produced an income of between £10 and £20 per tonne of CO2. This means a hectare of new woodland can produce an income of between £5,000 and £10,000. Generally, around 70% of the carbon units are sold upfront, providing an immediate income stream which in most cases exceeds the cost of the initial planting. The remaining units are then sold later as the woodland matures. Of course, as the woodland develops, other opportunities for income generation are opened up. These can include timber and wood fuel sales or the granting of felling licences. Another option is utilising sporting rights in the woodland once it has been established.

As well as the financial benefits, there are also many social and environmental benefits. In addition to the sequestering of carbon offered by the trees over their lifetime, the woodlands offer benefits to wildlife and biodiversity alongside protecting waterways and soil.

Income and profits from running a commercial woodland, either through the sale of WCUs, PIUs or the sale of timber and wood fuel, is exempt from Income Tax, Corporation Tax and VAT, so all of the profits generated from these activities are kept by the business. This can result in a higher return on investment when compared to undertaking other activities on the land which are subject to tax. However, in order to benefit from the tax exemptions, the woodland needs to be run on a commercial basis. It is therefore important to keep evidence to show that the woodland is being developed with a commercial outlook.

As with all diversification, there is no one size fits all approach, and while reforestation of low yielding land may be the right fit in some cases, other options are also available and should also be investigated. Anyone considering taking advantage of Woodland Carbon Units should seek professional advice from their accountant and land agent.

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