For an increasing number of High Net Worth individuals, family offices and institutions, interest in forestry investment is growing – but why?
We look at some of the drivers behind this rising interest, from changes in agricultural subsidies, woodland creation schemes, tax incentives and Environmental, Social and Governance (ESG) factors.
Why is interest in forestry investment growing?
1. Investment opportunities may be increasing
To date, farmers have received significant grants for looking after and improving the environment. Over the next 6 years, however, post-Brexit changes to agricultural legislation – including the phasing out of the Basic Payment Scheme and the transition of the Countryside Stewardship Scheme – may make it economically unviable for many farmers to continue. Many may be forced to sell their land, resulting in more upland and hill farms (land which is often suitable for afforestation) becoming available for woodland investors.
On such land, the planting of trees through woodland investment schemes can acquire 100% inheritance tax (IHT) relief, under Business Property Relief (BPR), subject to a two-year qualifying period.
2. Attractive tax reliefs are available for woodland owners
Here in the UK, woodland owners can – if certain criteria are met – benefit from Inheritance Tax (IHT), Capital Gains Tax (CGT) and Income Tax reliefs as part of the government’s ‘Conditional Exemption Tax Incentive Scheme’.
In our previous woodland investment blog post, ‘Is buying woodland a good tax planning strategy?’, Anthony Wyld, Managing Director of Forestry Investment Consultancy, details the tax incentives available to forest owners. With a strong emphasis on IHT planning, he answers the question “why buy woodland?” and he discusses the “typical” woodland buyer.
With asset values growing and IHT thresholds being frozen, the number of estates becoming liable for IHT continues to rise. Consequently, the demand for strategies to mitigate IHT is increasing.
3. There is more demand for ESG investments
In December 2015, the Paris Agreement – an international treaty on climate change – was adopted by 196 countries. Since this time, countries, companies, and individuals have taken steps to lower their carbon emissions.
As awareness of the Climate Crisis grows and interest in ESG investment rises, investors are discovering that, as a forest owner, they will be uniquely placed to help others reduce their carbon footprint.
Below, we discuss 3 reasons ways in which forestry investment may help you achieve your ESG investment goals:
1. You will be committing to sustainable forestry practices
Sustainable practices ensure that your forest is not exploited; it takes into consideration everything from carbon storage to the protection and support of native flora and fauna.
As a woodland owner in the UK, you are expected to adhere to sustainable forestry practices, with rigorous guidelines set out in the UK Forestry Standard.
“The standard ensures that international agreements and conventions on
areas such as sustainable forest management, climate change, biodiversity
and the protection of water resources are applied in the UK.”
Logging trees, for example, must always be done in a sustainable way, with a long-term growth strategy in place for every tree that you cut down. Incentives for restorative work – such as improving water quality – are also available in the form of grants.
2. You will produce a renewable, sustainable, low carbon and in-demand material
Wood is a renewable, sustainable, and low carbon material. William points out that there are many uses for it, from wood pellets and pulp (for paper and packaging) to wooden products like children’s toys and furniture.
He also places a great deal of emphasis on its use in construction, pointing out that timber is very much in demand for residential, commercial and community buildings. With carbon reducing goals becoming more commonplace and greater awareness of the eco benefits of wood, the construction industry – an industry renowned for its use of environmentally unfriendly materials – is now finding that it must embrace eco-friendly change. Replacing steel frames with timber frames is one such action.
3. You will have the option to grow and sell carbon units
The trees that you plant and maintain will remove carbon dioxide from the atmosphere in a process that is known as carbon sequestration. As a forest owner, you may be able to use your trees to grow and sell carbon units.
Carbon units are defined by the Woodland Carbon Code (WCC) as “measurable amounts of carbon dioxide removed from the atmosphere by trees as they grow.” Carbon units are either Woodland Carbon Units (WCU) or Pending Issuance Units (PIU). WCUs are verified and guaranteed to represent a tonne of CO2e which has been sequestered in a WCC-verified woodland. PIUs are a promise to deliver a WCU in the future. Either may be purchased by businesses to offset their current or future carbon emissions.
While your main business would typically include growing trees, logging trees, and selling the logs, adding carbon units to this could provide you with an additional or ancillary income. It is worth noting that carbon credit sales are outside the scope of income or corporation tax.
While the above points focus heavily on the environmental factors associated with forestry investment, the potential to also achieve social goals should not be overlooked. If you are socially focused, you could consider additional actions such as:
- Making your land available to local communities for recreational purposes.
- Hiring local employees and providing a variety of opportunities for upskilling and career progression.
- Running volunteer / educational schemes to enhance learning and personal development.
Is forestry a good investment?
Forestry returns only have minimal correlation with equities and bonds, whilst providing a positive correlation with inflation. However, buying woodland for commercial purposes does not come without risk.
One of the main risks is illiquidity. Forestry is a long-term investment, and it can be illiquid for significant periods of time. This is because it can take 30 or 40 years for a tree to mature.
At the time of writing this blog, forestry’s illiquidity is cushioned because there is such strong demand for it, creating a premium to the Net Asset Value (NAV) of the investment. However, this could change. If you are buying woodland for IHT planning purposes, for example, your beneficiaries may find it difficult to get out of the investment profitably in the future.
Forestry’s illiquidity can also make it hard to determine how much of your wealth you should be investing.
Overall, while its tax reliefs and ESG components are highly attractive, forestry investment is complex, and it does not come without risk. Before buying woodland, we recommend that you engage with a specialist consultant in this area as it is a high risk proposition which requires careful management.
Do you have questions about your tax or investment planning strategy? Our experienced, independent financial advisers are here to help. Contact our London or Nice office and book an appointment to receive advice that is tailored to you and your financial objectives.