Forestry ownership offers inheritance-tax dodge

published 2 August 2006

Returns from forestry hit 14.4% last year as timber prices soared 15.5%, the highest figure since 1992, according to the IPD Forestry index. But it's the generous tax breaks, including the opportunity to dodge inheritance tax, that are turning many an investor's head towards this appealing alternative property investment. Normally, the beneficiary of your estate would pay inheritance tax on anything over £285,000 of its value, but by managing woodland commercially, the land and all the trees on it become exempt after two years of ownership. There are two means of doing this:

Invest in forestry: dodge inheritance tax

The first is by buying directly from an agent or investment manager, such as Forestry Investment Management (FIM), or UPM Tilhill. They normally charge 1%-3% of the forest's value to manage it commercially. However, commercial plots can go from upwards of £100,000 to £300,000, which is why putting your money with a forestry fund like one of FIM's is often an easier option. Requiring a minimum investment of £20,000, the "forestry funds currently provide returns of around 4% a year", says Bruce Hutt of FIM on Reuters. But as income from commercial woodland is free from both income and corporation tax, "it is equivalent to 6.5% on a taxed investment". Both investment methods qualify for inheritance-tax relief.

Invest in forestry: demand for timber to rise

Timber prices did fall by 70% between 1995 and early 2003, according to the Forestry Commission enough to make any investor nervous. But demand is rising as China eats into its current stockpiles; three wood-burning power plants under construction in the UK will get set to use 12% of Britain's timber. Bear in mind that not all forests offer the same returns. Younger ones (under ten years) grew 27% in value over the three years to 2005, whereas older ones, where the trees were ready for harvesting, averaged growth of 7%- 8%. So although "there is no suggestion that forestry is an ideal investment for a pension," says Alastair Sandels of Fountains Forestry Division in Farmers Weekly, "it offers a low-risk, long-term investment that allows investors to take more risks elsewhere in their portfolio."