If you are in the fortunate position of having some money to invest, deciding where to invest it with any sort of sensible return is extremely difficult. Forestry sounds like it is the investment of rural types who know their Sitka Spruce from their Scotts Pine but keep your mind open for a moment; Forestry can be relatively maintenance and management free compared to other rural assets like farmland.
You don’t need to feed a tree or muck it out, you just need to plant it in the right place, hope the sun shines a little and that the rain falls from the sky. Nothing is completely management free and a good managing agent will keep out the vermin from newly planted woods with fencing or tubes and when they start to grow, thin the trees every 5 or 10 years or so. Drainage ditches and roads may need some repair work but no ploughing, seeding, combine harvesting every year, no buildings to maintain, just sit and watch it grow.
Forestry ownership offers a number of tax benefits. These include:
1) Capital Gains Roll Over Relief
If you have a CGT liability arising from the sale of a business you can roll over the gain into forestry, deferring the liability. If you don’t sell the woodland until the death of the original investor, the land is assessed for inheritance tax and the CGT liability is extinguished.
2) Business Asset Relief from Inheritance Tax
Forestry qualifies for 100% Business Property Relief once owned for two years. If owned at death there is no IHT payable on the forest.
3) Capital Gains Tax
The value of the growing timber is exempt from Capital Gains Tax. However, any increase in the value of the land from the date of acquisition until the sale of the property is taxable. The land value of a commercial forest can be as low as 15% of the forest value, as the majority of the value lies in the growing trees, which is exempt from CGT, so the tax burden is minimal.
4) Income Tax
Income generated from the sale of timber is exempt from both income and corporation tax.
The tax advantages are clear. Imagine a scenario where you sell a business, have a large CGT liability and you roll this liability over into a forestry purchase. After 2 years ownership you pass the forest on to a child/grandchild, with 100% Inheritance Tax Relief. Half the forest is harvested 10 years later with no Income Tax due on the sales and then the forest is sold 10 years after that with no Capital Gains Tax due on the increase in the value of the remaining trees. If the original investor has died in the interim, the CGT liability is extinguished.
UK forestry has been one of the best performing asset classes during the past decade delivering returns of 19% a year, and easily beating shares by 7%, gilts by 6% and commercial property by 6% during the same period, according to the IPD UK Forestry Index. Extending that period out to 22 years and returns are still an impressive 9% a year.
How to buy a forest and how much do I spend?
Demand for the best forests continues to be strong. Values lie between £1,000 per acre and £4,500 per acre. Some opportunities lie off market, changing hands behind closed doors.
We are grateful to The Search Partnership (http://www.thesearchpartnership.co.uk/) who contributed to this blog.