25/01/12 Money Growing On Trees - Investing in forestry

Money does grow on trees, according to Crowe Clark Whitehill, the national audit, tax and business advisory firm with local offices in Tunbridge Wells and Maidstone.

Thanks to major tax benefits and rising timber prices, the tax team at Crowe Clark Whitehill believes there could be an opportunity for those people who may be looking for a new home for their investments.

Simon Warne, Tax Partner at Crowe Clark Whitehill, said: “Investing in forestry could be attractive to people who are eager to diversify their investment portfolio and take advantage of tax reliefs.”

Buying a forest, directly or indirectly through shares in an established forestry investment company, can lead to major tax benefits. When a commercial forest, or share in one, has been owned for two years it qualifies for 100% Business Property Relief, which means it is also free from Inheritance Tax on death. In addition to this, the increase in the value of timber, but not the land, is exempt from Capital Gains Tax and income derived from the revenue generated by cutting down and selling the trees is free from both Corporation and Income Tax.

Simon Warne continued: “Investing into forestry provides an alternative option and has little correlation to stocks and shares, even inflation has little effect on forestry investments as the cost of timber is mostly dictated by simple supply and demand principles.

“Environmentally friendly, sustainable and considered low risk over the medium to long-term, timber merits serious consideration as a class of investment.”

Sowing a seed of caution, and highlighting the fact that investing in forestry and timber is best suited to the sophisticated and well-advised investor, Crowe Clark Whitehill has highlighted that direct timber investments require a large amount of capital.

Simon Warne added: “These types of investment should be seen as long term, as they run for a lengthy period and selling out early may, on occasions, prove to be difficult. It can also be expensive to manage it yourself, or indeed have someone do it for you. The difficulties and work involved in owning forestry directly has led to the establishment of other models, which offer certain investors the chance to buy a share of a fully managed timber investment.

“Choosing an investment in forestry solely for the favourable tax proposition should be avoided. It is equally important to consider the investment return qualities and a common case put forward to invest in timber is the simple fact that trees grow. In addition, there are no sudden new discoveries of commercial forests and, if prices are low, there is no necessity to harvest. Crop value is circa 85% to 90% of the value of a forest at maturity.”

Timber prices are currently rising, a trend many industry experts believe will continue in the medium term as the demand from developing countries, in particular China, increases. Constraints on the global supply of timber are also predicted to push prices higher.

The recently published Forest Market Report 2011 from property consultants Savills and woodland specialists UPM Tilhill showed a surge in values to an average of £4,650 per stocked hectare – up £1,174 or just over a third on the previous year.

The Forestry Commission indices show coniferous standing timber prices up 70% in the five years to September 2011 and figures from the Investment Property Databank show a 20% return for 2010 on UK Forestry and a 10.4% average annualised total return over 10 years.

Whilst the economy in Britain is struggling, the region remains a good area for growing trees commercially due to its climate, ease of access, sustainable timber methods and a robust land registry system.

Crowe Clark Whitehill offers complete financial and Inheritance Tax planning advice and can assist clients who wish to consider forestry exposure. It is important to note that alternative asset investments, such as forestry, are unregulated and should only be considered by sophisticated, high net worth investors who should take independent expert financial advice prior to investing.

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