UK forestry is gaining renewed attention from advisers and investors as recent Budget changes reshape the tax landscape, boosting the relative appeal of timber assets for wealth planning and long-term diversification.
In a recent Tax-Efficient Investment (TEI) special of our IFA Talk Podcast, Anthony Crosbie Dawson of Gresham House joined us to highlight some of the reasons behind why demand is holding firm despite market tensions, to help identify which clients forestry investment might work well for as part of their portfolio, and the risks which advisers should understand before allocating clients’ capital to such long term, illiquid assets.
Weathering the storm
Recent Budget changes may have unsettled parts of the investment landscape, but for forestry, they may have had the opposite effect. According to Anthony, Gresham House’s view is that the Budget changes have supported continued interest in the appeal of forestry as an investment option, with forestry offering potential tax-efficient characteristics, depending on structure and investor circumstances.
“When we harvest the trees and sell the timber, we may benefit from income and corporation tax efficiencies if somebody is investing via a corporate structure,” he explained. “In a world where taxes seem to only ever be going up, anything that provides some form of relief from the increasing tax burden can be appealing.”
Secondly, in terms of capital gains tax (CGT), CGT for a top-rate taxpayer has been increased from 20% to 24%, with timber being exempt from CGT in many structures. “All of the lovely long-term capital growth can be CGT efficient for investors,” Anthony noted.
While there is CGT on the underlying land as there is with all land Anthony explained, saying that when a forest is ready for harvesting at around age 35-40 years in the UK, it has a large proportion of its total value in the timber. “The vast majority of an investor’s capital growth is not subject to CGT in respect of the timber component,” he added.
The attractions of investing in UK timber
Anthony advised that the big change from the Budget was the threshold that’s been put in place. “Per person, there is now a £2.5 million threshold for BPR eligibility (subject to qualifying conditions),” he explained. “This is eligible for up to 100% business property relief, and that’s applicable across all qualifying assets.”
This allowance is transferable between spouses, meaning there can be a £5 million threshold amongst spouses or civil partners, up to which 100% inheritance tax relief still applies. Thereafter, inheritance tax is applicable at an effective rate of 50%. “You still get 50% relief from IHT, even above that 5 million threshold,” Anthony said. “There’s nothing that one can do that provides 100% relief from inheritance tax beyond those thresholds.”
Anthony believes that forestry is still a potentially attractive option alongside other qualifying investments, as good as any other option, while also becoming more appealing than a couple of other options. “On AIM investments, there is now no 100% relief from inheritance tax, so you only get 50% relief from IHT on all AIM investments,” he explained.
With pensions being brought into the IHT net, it’s likely that many more estates will be subject to IHT on pensions. Anthony noted that Gresham House expects a lot of people, particularly those who are still in the accumulation phase, to look at investments that provide relief from inheritance tax, perhaps even more so than allocating to AIM and to pensions in the coming years.
The risks of forestry
Forestry remains a long-term investment, and people should look at it that way. Anthony explained that, as part of a portfolio, forestry is not something that you’d be able to liquidate quickly.
“However, we do provide a secondary sale procedure, so people can realise their investment within about three months of wanting to sell,” he added. “It’s not something that you’re locked into for the duration of the fund term, but it is something that you should view as a long-term hold.”
In terms of climate and biological concerns, Anthony said that Gresham House insures against wind and fire and have done their share of modelling on climate changes. “We are forecast to become warmer and wetter here in the UK,” he noted. “Both factors may be positive for our growth assumptions of our conifer trees.”
Gresham House believe that this will cause the trees to grow quicker and become higher yielding, meaning they’ll have both shorter rotations and better-quality timber.
Driving the supply
Anthony emphasised that there is a clear case of supply and demand for forestry funds. A lot of the people who invested earlier in the trust did so back in the 1980s-90s. “Sadly, more of those original investors are dying,” he noted. “Their executives or beneficiaries are in many cases looking to sell or to sell some of the holding where it’s performed well.”
As a result, supply has increased and demand has remained fairly static. Whereas historically, their secondaries traded at premiums to net asset value (NAV), they are now trading at slight discounts. Gresham House are trying to address this issue by bringing in more institutional investors who are looking to deploy larger ticket sizes, while paying attention to the UK market.
“The UK market has always been a bit small for them,” Anthony stated. “However, because we’ve been successful at pooling lots of smaller entities into large, limited partnerships, the scale of these funds is now becoming attractive to institutional investors.”
Who forestry is right for
Gresham House have a minimum of £100,000 per investor, meaning forestry wouldn’t be suitable for those who can’t match that. However, Anthony recommended that anyone who’s looking to deploy that level of capital or more, may consider forestry. “It can be a great portfolio diversifier,” he explained. “It may also offer low correlation to mainstream asset classes, particularly bonds and equities, and it provides an element of protection from inflation.”
Forecasting forestry’s future
Anthony suggested that investors should consider forestry over a 10 year period, but noted that they can get out sooner, should they wish to. “Looking at it long term, which is the right thing to do, we in the UK import 82% of the timber that we consume,” he added, noting that the UK is the second largest net importer of timber in the world, after China. “We’ve got to start growing more of our own homegrown timber. That’s a key priority, which we at Gresham House, are helping to deliver upon.”
From Gresham House’s perspective, homegrown timber can never satisfy domestic demand. “This is great for us as growers of timber here in the UK, because we don’t have to export anything we grow,” he said. “As a result, we aren’t subject to any tariffs that might be imposed elsewhere in the world.” This therefore means that the price of timber globally is relevant to the price of timber in the UK, so it’s important to look at timber consumption on a global basis.
He revealed that Gresham House forecast the consumption of timber to increase threefold between now and 2050 globally, although he described that as a fairly conservative assumption. “The World Bank forecasts that it will increase fourfold in the same time frame,” he advised.
Rising demands
Anthony noted the megatrends which are driving the rising consumption, citing the rising global population and the ongoing urbanisation of that population, along with a housing shortage, which is not exclusive to the UK. “Along with that, there’s decarbonisation,” he added, “which is the replacement of steel and concrete with timber in construction, and the replacement of plastic packaging with cardboard in deliveries that we’re all very familiar with.”
He also outlined the different demands based on different parts of trees, noting the demand for high grade parts which go into building houses and higher rise buildings. “For the lower value part of the tree, you’ve got demand increases in packaging,” he added. “All of these mega trends are driving global timber consumption growth rapidly upwards.”
Fortunately, there is a reduction in illegal logging globally, and people have to certify that their timber is from sustainable sources. “All our timber is independently certified under the Forest Stewardship Council FSC logo as being sustainably sourced,” Anthony said.
For every tree that Gresham House harvest, they plant another two or three trees on the next rotation, making it an investment which is both lucrative for investors, and sustainable for the environment.
Conclusion
Anthony concluded by highlighting their returns to date, which have been strong in historical terms. compelling.
To summarise, Anthony reminded us that forestry offers investors the potential for attractive, risk-adjusted returns, with material tax benefits. “It is all delivered via a portfolio diversifier, which your clients can feel good about, because they are also delivering on the sustainability agenda,” he said.
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Anthony Crosbie Dawson
Anthony’s background is in investment banking, having previously worked for international firms in London, New York and South America, including Macquarie and Merrill Lynch. At Gresham House, he is responsible for business development, marketing and sales for our forestry and energy transition assets, also managing one of the funds.
Anthony has a BA (Hons) in History from Newcastle University and is an Investment Management Certificate holder. He is also a registered adviser with the Financial Conduct Authority.
