According to the UK Forest Market Report, 2021 was a record year for trading of forestry, and values rose from £16,000 a hectare to £19,300 on average, meaning they have more than doubled in the past three years.
Alternatives, like collectibles – think fine wines, vintage cars, art and handbags – may deliver rewards through value appreciation. But they can require hefty outlays just to hold them – in specialised storage and insurance costs, for instance.
Investment in trees has the potential to offer both income and capital returns. In addition, woodland attracts grants and financial incentives for carbon capture. And then there are the tax breaks.
To start with, there is no income tax on profits from commercial forestry in the UK. On the face of it, that sounds attractive, but woodland comes with costs too. You must factor in the time between planting and felling the trees, the expenses defrayed while they grow and the fact that if you make any losses, they cannot be set against other income.
To be free of income tax, the woodland must be occupied and managed commercially. That means there must be an intention to profit from the sale of raw timber, which effectively rules out smaller woodland investors.
Even then, it is only the tree-growing activity that is tax free; any profits from other activities on the land – like camping or growing Christmas trees – are taxable.
Similarly, there is no capital gains tax (CGT) on the sale of trees. However, if the whole woodland is sold, the amount received for the underlying land will be subject to CGT, so the price needs to be apportioned between trees and land, with only the former being tax free.
Business property relief
Perhaps the more compelling tax case for woodland investment is the fact that commercially operated woodland attracts Business Property Relief (BPR), which means it can help reduce your inheritance tax (IHT) liabilities.
The woodland must be run as a business with a view to making a profit. If this and other conditions are met, the relief may cover 100% of the value of the woodlands after just two years of ownership.
It is worth bearing in mind that HMRC may want to see evidence of the profit potential after your death, so keeping good records, with a business plan, evidence of annual inspections and management reports, will make the claim easier for your executors.
Agricultural property relief
Most woodlands are not agricultural property but can qualify for Agricultural Property Relief (APR) if they are ‘ancillary’ to farmland and serve a useful function. An example would be a strip of woodland acting as a wind shelter. APR is another relief from IHT. Unlike with BPR, the owner does not need to be actively involved in the farming; renting the land to a tenant farmer who uses the woodland as part of their farming business will secure eligibility – but only after seven years.
If neither BPR nor APR are available, then there is a specific claim for woodlands relief. This only defers the liability for IHT until the trees are sold, rather than providing a complete exemption. It only operates on the value of the trees and not the underlying land, and purchasers need a five-year ownership period to qualify as opposed to two years with BPR. Anyone who acquired the woodland by gift or inheritance has no minimum ownership period, however.
Although woodland relief is less attractive than BPR and APR, it can allow the deferral of the IHT to a point, possibly a long time in the future, when your heirs are in funds from the sale. In the meantime, IHT on the underlying land can often be paid over 10 years by instalments, making it possible to retain the woodlands within the family.
Woodland investment is a long-term prospect – you can expect your investment to be locked in for a decade or more. And there is no guarantee that it will continue to grow in value as it has recently. No investment should be undertaken for the tax breaks alone, and the headline reliefs for income and gains are less beneficial than we might expect. But, as part of a long-term family wealth plan, woodland investment might provide education costs or pensions for future generations and the inheritance tax relief possibilities mean it can be part of a discussion on tax-advantaged investments.
Important information: Tax laws are subject to change and taxation will vary depending on individual circumstances