As markets tumble, timber will continue to grow and earn cash

Published on Friday 3 April 2009 21:30

CURRENT demand for timber may be slack as a result of the downturn in house building, but the longer-term prospects offer significant potential for shrewd investors, according to Brodies, an Edinburgh-based firm of solicitors and financial advisers.

In its latest newsletter, Brodies sates: "Investing in commercial woodland is not a new concept. In the past 20 years it has become a legitimate portfolio asset for institutional and retail investors alike. With its biological growth providing a hedge against inflation and its less volatile nature – it has a negative correlation with other asset classes, such as equities and bonds – interest in timber continues to grow as opposed to the lack of confidence in the overall financial sector."

However, investors need to be aware that commercial woodland is different from amenity forestry, as it is managed on a business basis with a view to the realisation of profits.

It involves neither "farming" for income, corporation or capital gains tax purposes, nor agricultural property for the purpose of inheritance tax. Profits or gains arising from the occupation of commercial woodland are outwith the scope of income and corporation tax under current legislation. However, problems may arise if some or all the woodland is harvested for the Christmas tree market.

Traditionally, investors in commercial woodland have tended to be wealthy individuals. But there is scope for those further down the rich scale, according to Brodies. "The adoption of unregulated and collective investment schemes, such as limited partnerships and unit trusts , to purchase commercial woodland has afforded individuals the opportunity to have their money pooled within a fiscally transparent vehicle which protects them against loss."

There are also other tax advantages. Commercial woodland is considered a relevant business asset for the purpose of Business Property Relief. If the woodland is held for a minimum of two years, the total value of the asset upon the death of the investor will be free from Inheritance Tax and both the value of the land and the standing timber will qualify for 100 per cent relief

There is no doubt demand for timber will increase over the next decade, particularly as the biomass industry expands. The best example of that is the new plant in Lockerbie which is generating electricity through the use of sawmill residues.

So how does an investment in forestry compare with returns from other assets? Brodies states: "The Investment Property Databank (IPD) is a benchmark for UK forestry and each year issues a report. In 2007 IPD reported an average total return on forestry investments of 31.6 per cent. This can be compared to the return on equities of 3.5 per cent, bonds at 6.4 per cent, while there was negative return of 3.4 per cent on commercial property."

Much has changed in the financial world over the past 18 months, but even allowing for lower timber prices forestry is deemed as a safe investment with many fiscal advantages.

This year's Royal Show will be the last, organisers of England's biggest agricultural show confirmed last night. The annual show has been hit in recent years by the foot-and-mouth disaster in 2001, the very wet summer and flooding in 2007 and the arrival of bluetongue into the UK.

The Royal Agricultural Society of England said the event was no longer economically viable and would not continue in its present form after this year. This year's Royal Show, the 160th, will still go ahead at Stoneleigh Park, Warwickshire, this summer.