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 2017 was 15.7%)
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. Gresham House expects 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 Gresham House 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?
Gresham House 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 Gresham House 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 Gresham House 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.
Summary of Sitka Spruce Plant Research
There is a continuing programme of research into the characteristics of Sitka spruce with the long term aim of improving the genetic quality of planting stock. Gresham House actively monitors the latest developments in crop improvements to ensure our clients forests are maximising productivity and return on investment through biological growth and crop quality.
The research is being led by the Sitka spruce Breeding Co-operative which is a collaboration between Forest Research (the research agency of the Forestry Commission) and senior members of the forestry industry. The key objectives are:
- To improve the economic return of key coniferous species by ensuring they are well adapted;
- To grow faster and straighter than unimproved stock;
- To possess better internal wood qualities which are able to satisfy the construction timber market.
Target Characteristics of Sitka spruce
In analysing tree form the following characteristics are assessed, all of which are important factors to end users and thus affect commercial value. Research is actively focused on improving these specific traits of Sitka spruce:
- Diameter Increase
- Wood Density
- Stem straightness
- Minimal branching
- Acoustic Velocity
Improved Sitka spruce
Superior characteristics are being demonstrated by Seed Orchard plants and MOO cuttings when compared with the original ‘unimproved’ Queen Charlotte Island (QCI) provenance trees planted in the UK during the 20th Century.
Seed Orchard Sitka
Seed Orchard Sitka spruce (also known as ‘improved’ or ‘elite’ Sitka) are selected plants grown in a seed orchard from parents specifically chosen for genetically superior characteristics. These are known as ‘half-sibling’ plants, as each seed is produced from different parents. Due to the range of parents these crops do display genetic variation however to a much lesser extent than unimproved stock. Seed Orchard seedlings are robust plants suitable for planting in a range of conditions.
VP (MOO) Sitka
Vegetatively propagated (MOO) Sitka is the most genetically advanced Sitka seedling currently available. These are full-sibling cuttings (where both parents are known) grown from tip cuttings taken from selected improved mother plants. The similarity in genetic traits is expected to increase the uniformity of the crop compared with Seed Orchard and QCI stock. These plants are estimated to show a 20% improvement in diameter increase, straightness and branching without compromising timber density. The seedlings can be more fragile during the first phase of establishment. Accordingly, Gresham House typically plant these only on the best soils at lower altitudes to minimise the increased costs which can occur from failed plants.