Forestry in Scotland: A Time to Invest?

Returns from forestry have been driven by increased demand for timber and incentives to use wood as a source of energy.

Despite the economic turmoil experienced by many of us over the last few years, there is a broad consensus that forestry remains an attractive prospect for certain categories of investor. Forestry has been one of the top performing asset types in the UK over the last 15 years or so, generating returns of well over 10% a year during this period. This performance is mainly due to an increase in capital values. Returns from forestry have been driven by increased demand for timber and incentives to use wood as a source of energy. All in all, forestry remains an attractive investment vehicle for those wishing to diversify their investment portfolios to include a tangible investment with environmental credentials that can be enjoyed in many ways.

In addition, the following tax advantages are potentially available for commercially managed forestry:• Capital Gains Tax (CGT) profit from the sale of trees is exempt. Only capital profits on the solum (the underlying land) are liable to CGT. The portion attributable to the solum can qualify for holdover relief, rollover relief and Entrepreneurs’ Relief. Capital spent on infrastructure such as roads and fencing can be offset against any increase in the value of the solum.

• Income Tax: the sale of timber is not subject to income tax or corporation tax; and

• Inheritance Tax: potential for Business Property Relief at 100% subject to two years ownership (or less if the commercial forestry replaced another business asset). Article by Adam Gillingham, Partner, Turcan Connell.

The forestry and forest products sector in Scotland, which is worth around £1 billion per year and supports some 25,000 jobs, mainly in rural areas, provides a wide range of products; from sawn timber for the housing, packaging, fencing and garden products markets, to wood based sheet materials, (including wood chipboard, MDF and OSB), paper products, wood chips, sawdust, bark and biofuels.

As David Sulman, the Executive Director of the trade association, the UK Forest Products Association points out, continuity of wood supply is essential for the continued success of the sector, which is entirely dependent on supplies of domestic softwood. The Scottish Government is working to simplify and accelerate the approvals process for new woodland creation and he points out that there is undoubtedly a lot of land in Scotland, much of it lower quality land in upland areas, that is very suitable for timber growing.

“Our message to farmers and other landowners is that trees and sheep can exist side by side very satisfactorily. Woodland creation, with a focus on timber production, can make a useful contribution to farm incomes and the rural economy, without adversely affecting the scale of a sheep farming operation,” he notes.

David Sulman points out that woodland officers from Forestry Commission Scotland can offer farmers and landowners excellent advice if they want to explore the potential for timber growing on their land.

“It is worth pointing out that Scotland’s forest products sector has an impressive and continuing record of investment, from timber harvesting to wood processing and has strong prospects for growth. The sawmill sector has invested heavily in World-Class technology and equipment in recent years, enabling it to compete effectively in the World market. UK-grown softwoods now compete on a grade-for-grade basis with imported timber, which is good news for the UK,” he comments.

Today, around 40% of all the softwood used in the UK market comes from domestic supplies, with Scotland leading the way, with around 70% of the UK’s total output.