Five reasons experienced investors may find forestry attractive

Pension funds, family offices and even the Church of England have invested in forestry for decades, but this tax-efficient investment is often overlooked by private investors. 

Investing in forestry involves owning commercial forests – from mature, established forests to land planted for woodland creation. 

As the trees grow, you could benefit from capital appreciation in the value of both the trees and the land they are on – as well as income from selling the timber and carbon credits.

You can invest directly – though acquiring an established forest can set you back millions – or, for a much smaller outlay, become a shareholder in a portfolio of forests run by a professional manager.

Why could this be attractive? Here are five reasons why experienced investors might want to consider it.

Please note: investing in forestry is only for eligible investors who have sufficient knowledge and experience (you can fill a questionnaire to see if you qualify). It is a very long-term and illiquid investment. 

1. Valuable tax reliefs

Investment in UK commercial forestry could provide significant tax benefits under current rules.

One of the main attractions is the inheritance tax (IHT) relief: if you’re concerned your loved ones may face a big IHT bill, this could be a simple way to keep wealth in the family – rather than lose a substantial amount to the 40% levy. 

• Inheritance tax: 100% IHT relief after two years due to Business Property Relief (“BPR”), provided you still hold the investment on death. 
• Capital gains tax: no CGT on any gain in value of timber. The underlying land is subject to CGT although most of the gain is likely to be in the value of the timber.
• Income tax: no income tax on timber revenue or the sale of carbon credits. 

Note, tax rules can change, and benefits depend on circumstances.

2. A top-performing asset class

UK forestry has a strong long-term performance track record. Based on the most recent data available to us, it was the best-performing UK asset class over a period of one, five, 10 and 25 years to December 2022, producing annualised returns of 14.5%, 22.2% 17.8% and 12.5% respectively. Moreover, forestry is broadly uncorrelated to other main asset classes, which means it could do well when your other investments are struggling. Please remember, past performance is not a guide to the future. 

3. An inflation hedge

When the economy is growing, people and companies tend to spend more – as both wages and profits rise. That increases demand for all sorts of product, which can in turn lead to higher prices, creating inflation.

Because timber is a key input for a wide range of products, from packaging to construction, increased economic activity also means an increase in demand for timber. However, timber supply is pretty constrained. It takes decades to grow a tree from seed, and the maximum amount of timber available at any one time is pretty fixed. When rising demand meets constrained supply the result is rising prices.

Because forestry returns – both capital growth and income – largely depend on timber prices, and because timber prices tend to rise when the wider economy is experiencing inflation, forestry is often seen as an inflation hedge. In other words, forestry investments have historically had a positive correlation to inflation: inflation could play for you, rather than against you. Remember past performance is not a guide to the future and this correlation could change.

4. Resilience in market downturns

Trees do not have to be harvested every year – nor at a particular time. Sitka spruce – the most common variety in UK commercial forests – has a 15-year harvesting window. So, if timber prices go down, the harvest can be delayed until more favourable times. In the meantime, the trees continue to grow, potentially enhancing eventual returns.

5. Carbon credits: another potential source of revenue

Forestry investment can create carbon credits on a large scale. These can be sold, for instance, to corporations looking to offset carbon footprint. This additional source of income might not be a primary objective but could help buffer against relying only on the value of timber.

What are some of the risks?

Remember: investing in forestry is high risk.

• Capital is at risk – investors should not invest capital they require over the medium to long term, or which they cannot afford to lose.
• Taxation risk – tax rules can change, and tax benefits depend on individual circumstances. Eligibility for BPR is assessed at the date of death.
• Market risk – investments in UK commercial forestry are largely dependent on the UK timber market. An economic slowdown or a drop in construction demand are likely to have an impact.
• Risk of disease and pests – most trees are Sitka Spruce which are insured against ‘wind blow’ and fire. However, it is not possible to insure the crop against disease.
• Low liquidity – this is a long-term investment and should not be considered as readily realisable.