Inheritance Tax – Business Property Relief and Forestry
In Inheritance Tax – Mitigation using Business Property Relief – I introduced both Business Property Relief (BPR) and the concept of this being available to non-entrepreneurs. In this article, I will begin to explore the use of commercial forestry as a means of benefitting from BPR.
The UK has good climatic conditions for growing trees and forestry has developed as an investment medium over the last few decades as a result of favourable tax breaks. If the investment is structured in the right way, commercial forestry represents a good shelter against inheritance tax while also producing periodic tax-free income as mature trees are felled and the timber sold.
The key element of the inheritance tax concession is that the forestry investment must be run as a business and held for more than two years to qualify for the Business Property Relief exemption from IHT.
Forestry has been quite cyclical. From the mid 1990s onwards, forestry prices and timber prices suffered from strength in sterling and a glut of timber from the newly independent Baltic States. It was only from the mid 2000s onwards that prices recovered sharply producing stellar returns for those who had the good fortune to invest at the bottom.
There are a number of opportunistic forestry investment companies that have sprung up over the past 2-3 years in order to take advantage of the “green, environmental” buzz. Most of them are offering the opportunity to lease a plot of land with “sapling trees” planted on it. They are quoting returns based on a 10-12 year period at which point they say that your trees will be the optimum age for harvesting. However, if these trees are hardwood species, such as teak, it is completely wrong to say that a 10 year old teak tree will yield exceptional profits when it is harvested. The fact is that teak needs to be 25 years or older to have the required quality, density and volume to produce the kind of profits being promoted. Investing in teak saplings now that are going to be harvested in 10-12 years will obviously not produce this.
Teak is historically a strong commodity for investment purposes with the timber highly valued and in demand worldwide. However, if you are going to invest in teak you should apply the following due diligence:
- Check that the trees you are purchasing are part of an established plantation. Ideally you should look to invest in Teak trees that are around 15 years old because in 10 years they will be mature (25 years old) and at their optimum harvest value.
- Make sure that there is independent verification on the trees, plantation, leases, tree deeds etc.
- Make sure that the trees are numbered and GPS co-ordinates provided with your tree deed.
- Make sure that you will have full control over your trees at all times and that you are not investing in a collective scheme.
- Make sure that there is an “independent” Forestry Management Company” looking after your trees on sight and that you have a separate letter from them verifying this.
- Make sure that an independent firm of accountants will provide you with an annual valuation of your trees.
- If you are looking for a “green” investment then look for plantations which are being commercially operated and have some form of demonstrable benefit to the environment and social benefit to the indigenous population.
Most timber investment schemes on offer are classified as “Unregulated Collective Investment Schemes (UCIS)”, which the Financial Conduct Authority (FCA) does not consider are suitable for the majority of Investors. In particular, as the name suggests, a UCIS is not regulated by the FCA and nor is it covered by the Financial Services Compensation Scheme. I don’t offer advice on any UCIS investments, but can introduce a suitable forestry adviser if this type of planning is of interest.
Unless you have a particular reason for investing in forestry, I wouldn’t invest directly, but chose one of the specialist BPR products that uses forestry as a part of its portfolio.
If you believe you have an Inheritance Tax problem and want to know what legitimate steps you can take to mitigate this, contact me today, or complete the form below.