18 July 2017

Rural news - summer edition: spruce up your portfolio - UK woodland investments

There is a reassuring permanence to timber, not least because, irrespective of revolutions, reformations and referenda, the trees continue to grow.

Investors continue to be attracted to the 13% of the UK landmass that today remains forested, and a multitude of incentives, both commercial and fiscal, mean that woodland can provide a good investment in a variety of ways. In European terms, 13% is a low percentage, and the Government would like to see an increase in tree cover in the UK.

Beneficial tax treatment is one aspect. Commercial woodland attracts Business Property Relief (BPR) from Inheritance Tax (IHT) after two years of ownership have passed, which protects the entire value of the land including the value of the trees themselves from any charge to IHT on the death of the owner.

In addition to BPR, the revenues generated from selling harvested timber attract neither Income Tax nor Corporation Tax. Similarly, as the trees grow and accrue capital value as potential timber, this increase in value is not subject to Capital Gains Tax (‘CGT’). Any sale of the land itself would be chargeable to CGT in respect of the increase in value of the underlying land, but not the increase in value of the timber. Investors may also have the option of rolling over a gain made elsewhere into a woodland investment to defer an otherwise chargeable gain. Another notable benefit for commercial woodland is that annual charges such as business rates that affect most commercial premises do not apply to forests.

The forestry sector also holds significant appeal from a purely commercial perspective. Increases in capital values have made forestry the top performing asset type in the UK in the last decade, and it is seen as relatively insulated from the fluctuating fortunes of other markets.

Despite a healthy domestic industry, the UK remains one of the world’s top importers of sawn wood, catering for consistently high demand. Unlike other sectors, given that woodland takes decades to mature, supply forecasts are relatively accurate, and appear to bode well in the medium to long term. Limited planting of commercial species such as Sitka Spruce in the 1990s looks set to create a supply shortfall in the 2030s, which may well drive prices of timber and its derivatives upwards.

Whilst the UK is much less exposed to some of the industry specific risks, such as forest fires, there are nonetheless other considerations to bear in mind for prospective purchasers. The shroud of uncertainty brought about by Brexit poses questions, though the primary impact thus far has been to increase the cost of importing timber. Furthermore, as the heartland of the UK forestry sector, the issue of Scottish independence may bring with it future uncertainties.

Lastly, it is worth noting that there is also an enjoyment factor to owning woodland that sets it apart from other assets. The charm of hiking, camping, shooting or stalking in one’s own forest is another way to extract a ‘lifestyle dividend’, and is not to be underestimated.