Returns are as solid as the product, says Gail Clarke
We will shortly be coming to the end of a period which, for many lovers of the countryside, is the best time of year – that window from late September to mid-November when our natural forests are ablaze with autumn colour.
Our commercial forests are somewhat different, the deep green trees found there hardly change in appearance from one season to the next. That’s because they have been planted for the specific purpose of providing a raw material that is essential to a myriad of industries and, as such, they play a key role in Scottish exports both to other parts of the UK and overseas.
For the investor in forestry, returns have been as solid as the product itself: the market in Scotland has out-performed all other forms of investment over the past 20 years in terms of rate of return. This trend is predicted to continue for the next 15-20 years with the current IRR (internal rate of return) being about 15 to 20 per cent.
That forestry has consistently provided above-average returns over many years is widely-known. Less apparent is what investment in the sector can bring to estate planning.
Forestry can be managed as a business with the capital asset and income from it sheltered within the umbrella of Business Property Relief. This relief can be 100 per cent and, therefore, has the potential to mitigate investors’ exposure to inheritance tax (IHT), although the forestry investment must be run as a business and held for more than two years to qualify. For individuals, roll-over Relief for Capital Gains Tax may also be available and there is no income tax payable on the profits from the sale of timber.
Despite the returns and being IHT-efficient, few people are aware how forestry can be used for the latter purpose.
Perhaps one reason is the long-term nature of forestry as an investment which could compromise the aforementioned advantages related to IHT.
So, if forestry is so commendable, why are large numbers of small-investors, hit by seemingly endless low interest rates and, more recently, by a falling stock market, not planting their pounds in our forests instead?
One major reason is that, to be worthwhile, forestry really requires a minimum investment of £200,000 and those who participate are expected to be prepared for a long haul – at least ten years if saplings are already planted and growing – before the trees begin to bear their financial fruit; in which case it is not a vehicle for the great mass of the saving population. Also, it seems relevant to point out that investors without knowledge of the sector – in effect. The majority – are advised to use specialist forestry managers for which service and management charges will apply although even allowing for these, net returns will likely still be favourable.
But for those affluent enough to afford it, forestry represents continuity, something which investors crave. The long-standing tax advantages have not altered despite the enormous political and social environmental changes that have taken place over recent years. There do not appear to be any political clouds on the horizon that might affect future financial performance, either at Westminster or Holyrood. Indeed, the present Scottish Government is supportive of the forestry industry.
For some investors, forestry is simply a ‘feel good’ financial vehicle, the planting of trees on appropriate land being considered to be one of the most environment-friendly acts modern man can take part in. This factor has also created a healthy diversion into direct investment in smaller woodlands. Although the percentage return is usually less than that gained from the largest commercial woodlands, tree-loving investors are quite happy to accept a lower financial yield if it means experiencing what, for them, is the sheer joy of owning their own tract of woodland and sharing it with family and friends.
• Gail Clarke is a director, rural land and business, at Blackadders www.blackadders.co.uk