Long term Investors go down to the Woods
The soaring price of timber (15.5% last year) and generous tax breaks are bringing more investors into the alternative property investment of forestry.
Returns were as high as 14.4% last year on the back of timber rises, the highest figure since 1992 according to the IPD Forestry index. Many investors have discovered forestry not only as a means to make good returns but also as a means to dodge inheritance tax.
The beneficiary of your estate would normally 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.
Invest in forestry: dodge inheritance tax
There are two ways into forestry investment. It is possible to buy 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. Commercial plots go from upwards of £100,000 to £300,000, which is why putting your money with a forestry fund like one of FIM's can be 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.
And here's the good bit. Income from commercial woodland is free from both income tax and corporation tax, making it equivalent to 6.5% on a taxed investment. Both investment methods qualify for inheritance-tax relief.
But as forest investments can grow, timber can fall. Prices fell by 70% between 1995 and early 2003, according to the Forestry Commission — so it is not suitable as a short-term sole investment but rather a low-risk long term one.
But demand is rising fuelled by China's construction behemoth, and there are three wood-burning power plants under construction in the UK on track to receive 12% of Britain's timber. Bear in mind also that not all forests offer the same returns. Forests under ten years old grew 27% in value between 2002-2005, whereas forests with trees ready for harvesting averaged growth of 7%- 8%.
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