Mighty investments will grow from little acorns

THIS may come as something of a surprise to Extinction Rebellion but trees have always been an emotive subject for the British.

It probably goes back to Spanish Armada times and the need for oak with which to build warships for the navy.

In the 1980s trees were in the news for less noble reasons – woodland investment could be written off against personal income tax, prompting a forestry boom and accusations of “celebrity tax dodging” directed against sporting and television personalities.

Controversy continues – earlier this year The Times railed against the super-rich supposedly buying up swathes of Scottish forests.

And of course trees are currently in the spotlight because, as they absorb and lock in CO2 from the atmosphere, environmental protesters hail planting as one way of saving the planet.

But, from an investment point of view, trees are tax efficient, can produce a good return, and offer important diversification.

Under current UK tax law there is no liability to income tax, corporation tax or capital gains tax arising from growing timber. In most circumstances, commercial forestry qualifies for 100 per cent relief from inheritance tax, through Business Property Relief, once held for two years.

The Investment Property Databank UK Forestry Index, which measures the performance of more than 100 plantations of Sitka spruce, the main source of UK timber, has delivered average returns of 15.7 per cent and 9.2 per cent a year over the past ten and 25 years respectively. That’s well ahead of both equities and bonds over the same period.

An investment that provides legitimate tax planning and sustainability is a rare combination.

Gresham House, with nearly £1.3 billion worth of forests under management, across 130,000 hectares, states: “Investors in UK forestry have benefited from compelling real returns, which have little correlation to mainstream asset classes, but have a positive correlation to inflation, making forestry an effective diversifier to other asset classes and an inflation hedge.

“Through reduced deforestation, active forest management and more afforestation, global forestry could help to significantly reduce the impact of global carbon emissions.”

Gresham House believes world demand for timber will increase substantially as both populations and GDP per capita surge. It predicts prices “will rise significantly in the medium and long-term”.

Rising timber prices not only have an impact on the value of timber, but also on land values – a 50 per cent increase in timber prices, from £60 per tonne to £90 per tonne, results in an approximate 100 per cent increase in land value, as the land becomes more financially productive. Uses include construction, fencing, packaging, furniture, newspaper and magazines and biomass for electricity production.

The UK imports 82 per cent of its timber consumption. At just 13 per cent, we are the most sparsely forested country in Europe.

However, as with most investments, there is a negative side.

Timber investments are illiquid, forests being hard to sell quickly if you require your money in a hurry; you need to be both a long term and a patient investor, prepared to receive little income, but likely incurring costs, whilst your trees grow; the timber price can be volatile; forestry valuations are subjective; and these are unregulated investments, so you won’t be able to get redress via the Financial Ombudsman Service or the Financial Services Compensation Scheme.

There are also physical risks such as fire, wind-throw, pests and disease. Also forestry really is largely the preserve of high net worth individuals.

Direct investors typically need around £3 million. Investing with others still requires around £100,000 or more. Nevertheless, to slightly change the well-known saying, mighty investments from little acorns grow.

Trevor Law is managing director of Eastcote Wealth Management, chartered financial planners,

based in Solihull. Email: tlaw@eastcotewealth.co.uk

The views expressed in this article should not be construed as financial advice