In­vest in the fu­ture with fam­ily trees

Buy­ing a com­mer­cial for­est can help your money grow and you can also avoid in­her­i­tance tax

The Daily Telegraph - Your Money - - Investing In Forestry - By Justin Harper

YOU can do your bit to save the planet and pre­serve the value of your heirs’ share of it by mak­ing use of tax­ef­fi­cient in­vest­ments in tim­ber.

Wealth held in the form of a com­mer­cial for­est be­comes free of in­her­i­tance tax (IHT) af­ter you have owned it for two years be­cause it qual­i­fies for busi­ness prop­erty re­lief. Com­mer­cial wood­lands are de­fined as prop­erty where tim­ber from the for­est is ac­tively be­ing mar­keted and sold.

So, sadly, buy­ing a plot of land with a few trees on it for leisure pur­poses — such as camp­ing or com­muning with na­ture — is un­likely to qual­ify as be­ing IHT-free.

How­ever, where the for­est does qual­ify as a com­mer­cial con­cern, the in­come made on any sale of tim­ber is free of in­come tax and any rise in the value of the trees is free from cap­i­tal gains tax.

Alan Guy, head of forestry mar­ket­ing for es­tate agents Foun­tains, ex­plained: “To get the tax breaks it has to be com­mer­cially man­aged wood­land — so you must have a proper man­age­ment plan, prove there is reg­u­lar main­te­nance and that you in­tend to har­vest the wood. This is hard to prove with an­cient trees, es­pe­cially in a small wood.

“It could mean open­ing up a tea shop on the site, let­ting it for shoot­ing par­ties or mar­ket­ing the wood as an amenity. The Rev­enue has never chal­lenged what is deemed com­mer­cial in court but you are still tak­ing a risk if you’re not ac­tively grow­ing trees to har­vest.”

Last year forestry was the best per­form­ing as­set class re­turn­ing 26pc com­pared to 17pc for shares, ac­cord­ing to re­search house In­vest­ment Prop­erty Data­bank.

You can ei­ther buy a whole for­est, which — as you would ex­pect — varies in price de­pend­ing on its size and lo­ca­tion in the UK, or pool your money to­gether in a trust and buy a share of a for­est.

One of the lead­ing play­ers in this field is Forestry In­vest­ment Man­age­ment which of­fers both choices.

It of­fers en­tire forests, start­ing at about £100,000, or for­est funds which have a min­i­mum in­vest­ment of £25,000.

Bruce Hutt, a di­rec­tor of Forestry In­vest­ment Man­age­ment (FIM), said: “In­vest­ing in forestry can be a very good in­vest­ment as long as you ap­pre­ci­ate a cou­ple of things: it is a long-term in­vest­ment as you are re­liant on the time it takes for trees to grow and be ready to be used for tim­ber. And you must not un­der­es­ti­mate the man­age­ment that is needed — a for­est needs to be main­tained, pub­lic ac­cess kept in or­der and the tim­ber mar­keted.”

FIM charges 0.6pc of your in­vest­ment as its an­nual man­age­ment charge.

Up­front charges for an en­tire for­est are ne­go­tiable but fixed at 6pc if in­vest­ing via a fund.

The ser­vice in­cludes in­sur­ing the for­est against fire, dis­ease and other dan­gers.

Mr Hutt says re­turns are cur­rently run­ning close to 5pc per an­num. For a high-rate tax­payer this is equiv­a­lent to 8.3pc be­fore tax.

Com­mer­cial forestry in the UK is fo­cused on soft­woods, of which Sitka spruce is the main species. Th­ese are mainly grown in the higher rain­fall ar­eas of the coun­try – Scot­land, Wales and the north of Eng­land.

A spruce takes be­tween 35 and 40 years to grow. Once felled, its main use is in the con­struc­tion in­dus­try for tim­ber frames. It is also needed for chip­board, pulp, pa­per and fences.

For­est in­vest­ment there­fore de­pends on your timescale. If you want a reg­u­lar tax-free in­come a ma­ture for­est near har­vest date is the best op­tion.

But those think­ing over a longert­erm, pos­si­bly in­vest­ing in forestry as a pen­sion pro­vi­sion, might buy into a younger for­est. This could lead to cap­i­tal growth in the early years as the trees and the land in­crease in value, and in­come in later years as the trees ma­ture.

Tim­ber prices had been in de­cline for eight years un­til last year when prices picked up. De­spite a strong 2006, prices are still 51pc be­low their peak of 1995, show­ing the po­ten­tial for fu­ture rises.

One of the fac­tors has been strong global de­mand for build­ing ma­te­ri­als, es­pe­cially from re­source-hun­gry China.

Mr Hutt added: “An­other fac­tor is that the Gov­ern­ment is ac­tively en­cour­ag­ing en­ergy pro­duc­tion from sus­tain­able, re­new­able sources and elec­tric­ity sup­pli­ers have to use a set per­cent­age of re­new­ables for their en­ergy sup­ply.

“One of the mar­kets meet­ing this re­quire­ment is gen­er­a­tion from bio­fu­els which uses sawmill residue and some round woods. This de­mand will push up prices fur­ther.”

The UK uses all the tim­ber it pro­duces and has to im­port 85pc of do­mes­tic con­sump­tion, mainly from Amer­ica, Scan­di­navia and East­ern Europe. But high fuel prices have meant in­creased costs of ship­ping make Bri­tish wood more com­pet­i­tive.

Ox­ford­shire-based es­tate agent John Clegg also spe­cialises in forestry buy­ing and man­age­ment. Among its cur­rent sales are a four acre wood in Buck­ing­hamshire for £25,000 and a 287 acre for­est in East Sus­sex for £285,000.

Foun­tains says it is reg­u­larly con­tacted by in­vestors want­ing “their own piece of Eng­land”.

Un­sur­pris­ingly, the fur­ther north you go, the cheaper forests are per acre. The cheap­est for­est in the north of Scot­land would set you back about £550 per acre while an oak wood­land in the south of Eng­land costs around £3,000 an acre.

Foun­tains charges an an­nual main­te­nance fee de­pen­dent on the size and type of for­est.

An­other po­ten­tial ben­e­fit of for­est in­vest­ment is that the Forestry Com­mis­sion of­fers grants to help up­keep the wood­land. Th­ese are higher for an­cient oak wood­lands.

But it is im­por­tant to beware that this type of in­vest­ment is not reg­u­lated by the Fi­nan­cial Ser­vices Author­ity, so there are fewer statu­tory safe­guards in place than ap­ply to more con­ven­tional in­vest­ments.

Bark­ing up the right tree: last year forestry was the best per­form­ing as­set class, giv­ing 26pc

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