Invest in the future with family trees
Buying a commercial forest can help your money grow and you can also avoid inheritance tax
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