Why is forestry so tax efficient?
There is no income tax when selling timber and no Capital Gains Tax (CGT) on the increase in value of timber. The increase in the value of land is subject to CGT. A commercial forest will also qualify for Business Property Relief (BPR), which provides 100% relief from inheritance tax (IHT), after two years of ownership.
When does the two year qualifying period for receiving 100% relief from IHT begin?
The two year qualifying period for BPR commences when the trade starts, i.e. from the purchase of a property or acquisition of shares in a fund.
What are the main markets for timber?
Forest owners benefit from diverse markets. There are seven main markets: construction, packaging, pallets, fencing, panel board, paper and biomass for energy and heat – this last market has led to new competition for the least valuable part of the tree and therefore increased the value of the whole tree to timber purchasers. The forest owner is not dependent on one market to sell timber to.
Why have returns on forestry investments been so good (the independent IPD UK Forestry Index annualised 10 year return to December 2015 was 18.4%), when nominal and real timber prices have fallen by 30% and 50% respectively from their mid-1990s peaks?
The essential ingredient is the assured growth rate in the volume of timber, combined with an increase in the unit value of the timber as the trees increase in size – larger trees provide less waste for sawmillers. So even at static timber prices, the investment should provide a positive return. FIM expect timber prices to be higher in the future due to substantial increases in consumption in both the developed and developing economies, in particular China and India, at a time when supplies will become increasingly constrained. A further factor in performance, as measured by the IPD UK Forestry Index, is a rise in underlying land values and the general level of plantation values, which are dictated by investor demand and the lower yield requirements of such investors. This is in turn partly driven by expectations on future timber prices. Rising timber prices should therefore enhance returns.
The FIM Timber Index indicates that there is a degree of volatility in timber prices. Is this an issue in considering an investment in forestry?
A benefit of forestry is that when prices drop there is no need to harvest. Value is stored "on the stump" and the trees continue to grow both in volume and unit timber value. There is generally a window of five to fifteen years in which a crop can be harvested, which means that the volatility in timber prices can be exploited to the landowner’s advantage.
What is the minimum investment?
FIM acts for private clients with an acquisition appetite for direct ownership of commercial forests, generally from £3 million upwards.
Other investment structures are available for smaller investors.
Is an investment liquid?
There is an active market for forest properties which sees good properties sold quickly. That having been said, forestry is the same as any other property, it is potentially illiquid as there is no perfect, established market. The trees continue to grow in volume, should a property remain unsold.
Who manages the forestry?
Experienced local woodland managers. They provide ongoing budgets for the development of the forest, which are reviewed by FIM and amended as necessary in order to ensure that the investment achieves the best possible return in the long term.
How is the forestry asset valued?
By taking into account location, the age and quality of the crop and the state of the infrastructure, in particular access to the forest. Value is ascertained by market evidence of comparable recent forest sales and is also calculated on a discounted cash flow basis.
How expensive is it to restock a forest?
The gross cost is about £3,000 per hectare. There is normally a planting grant available to aid re-establishment, which results in a net cost of approximately £2,700 per hectare.
What type of tree is best to invest in?
Sitka spruce produces the greatest volume of timber in the shortest time in the UK (it has a 35-50 year rotation) and has the greatest diversity of end uses. Once established, Sitka spruce grows at about 5% per annum on average across a rotation.
What are the main risks of an investment into forestry?
The main risks are fire and windblow. These, along with public liability, are insured against. There is currently no insurance cover for pests and disease but trees with a relatively short rotation, such as Sitka spruce, are less vulnerable to pests and disease than trees with a lifespan of more than 50 years.
What are the environmental benefits to owning forestry?
All FIM properties are managed in accordance with the UK Woodland Assurance Standard (UKWAS) and therefore have full Forest Stewardship Council (FSC) certification. This means that all harvested areas are replanted, ensuring that the forests are sustainable. Furthermore, the forests are managed in an environmentally friendly manner, which encourages biodiversity.