Protecting your wealth from Inheritance Tax

Investing in commercially operated woodlands is a way to protect your wealth from inheritance tax with other tax benefits too.  They are claimed to deliver impressive financial performance.

investing in commercial woodlands

How do forestry investments work?

Most commercially operated woodlands are owned by institutional investors such as pension funds or family offices and indeed the Church of England.  However experienced private investors are increasingly drawn to owning woodlands too.

The principle is relatively simple – you invest in commercial forests for the long term. Put simply, your trees are planted and grow.  As they do, you benefit from capital appreciation in the value of the trees and the land they are on and any income produced by harvesting the trees and selling the timber –the main part of the tree used for construction, with the offcuts being used for biomass.

Investment in forestry is however a long-term commitment – usually 10 years or more – and a forest is by its nature an illiquid asset. But if you are comfortable with this investment profile, it can have significant tax benefits and once established requires comparatively little upkeep.

But first, what are the typical tax benefits?

Investment in UK commercial forestry can have significant tax benefits:

  • Inheritance tax: 100% relief after two years with Business Property Relief provided you still hold the investment on death
  • Income tax: there is no liability to income tax on timber revenue
  • Capital gains tax: there is no CGT due on any gain made on the value of the timber – the underlying land is subject to CGT as most of the gain would be in the value of the timber

Please remember tax benefits depend on circumstances and tax rules can change.

commercial woodlands

And more importantly, what are the main risks?

Below are some of the risks associated with owning woodlands – this is not intended as a comprehensive list nor an assessment of whether woodlands are the right investment for you.  The key risks are:

  • Capital is at risk – like all investments, the value of woodlands can go down as well as up
  • Taxation risk – tax rules can change and tax benefits will depend on your individual circumstances
  • Market risk – an economic slowdown or a drop in construction demand are likely to have an impact on the value of harvested timber
  • Risk of disease and pests – insurance can usually be obtained against fire, but not against disease or pests
  • Low liquidity – woodlands are an illiquid investment and not readily realisable

Although it is said that woodlands produce an impressive financial return, fluctuations in performance can be wide depending on the woodlands themselves.

How to invest?

You could buy and manage a forest yourself. This could set you back at least £1 million for a commercially operated woodland.  A popular alternative is to invest through a forestry fund – for a much smaller outlay you could buy into a large and diversified forestry portfolio, run by a professional manager.

Is there a more romantic way to own forestry?

investing in forestry

Whilst forestry funds are a viable way of acquiring commercially operated woodlands, you may wish to own your own forest, albeit with a relatively small parcel of land.  Such woodlands tend not to be commercially operated due to the absence of scale, and therefore the favourable tax reliefs described above may not be available, but that is not the point of the investment!

Alternatively, woodlands may be part of a farming enterprise and so should qualify for 100% relief from Inheritance tax under the rules associated with Agricultural Property Relief.

The relief from income tax for the commercial operation of woodlands only applies to growing trees for raw timber.  Other activities such as growing Christmas trees or renting the woodlands to another party for, say, part of a shooting enterprise, or for a camping or glamping operation, are however subject to income tax on the profits and losses of those activities.  On the other hand, such smaller parcels of woodland may also qualify for inclusion within your Self Invested Personal Pension Scheme (“SIPP”) provided the woodlands can be rented out at a commercial rent, usually back to you.

In summary

Forestry is one of the least liquid assets available, so it can be difficult to sell. If you invest via a fund, some managers will offer a secondary market, which could help you realise your investment, although there are no guarantees.

If you own a commercially operated woodland on a significant scale such that it is a business, then all of the major agricultural land agents in the UK will be interested in helping you buy, manage and sell your woodland.

The alternative of owning a relatively small parcel of woodland associated with a substantial rural residential property will be more easily sold with the property itself.  Indeed that may be one of the attractions of purchasing such a property in the first place.

Perhaps most importantly, having your own woodland can however be one of the most personally satisfying investments.