The forestry industry is a key player in our economic recovery and in mapping a route to a greener and more sustainable future. The ‘green recovery’ has, at its heart, investment in projects that are both good for the economy and the planet. Trees are a crucial natural carbon solution and, in addition to carbon capture, forestry can also support a number of sectors, such as the development of co-located wind farms within existing plantations or by providing locally-sourced sustainable materials for use in the housebuilding industry. There is also untapped potential in the carbon offsetting market, giving businesses the opportunity to compensate for their carbon dioxide emissions.
Despite the economic impact of the coronavirus pandemic, the forestry sector has remained buoyant. Market activity demonstrates that forestry properties are seen as a relatively ‘safe’ asset for investment during these uncertain times and while interest rates remain at a historic low.
Forestry properties have traditionally been, and remain, prime candidates for wind farm developments. As technology improves and turbines become larger or taller, it is easier to build a wind farm which is located on a forestry site using a minimum amount of forestry land. This allows landowners to continue to operate and manage a commercial forest around a windfarm, often with very little keyhole felling required.
Tax benefits
There are many reasons why forestry properties are acknowledged as a sound investment – both long and short term, not least because of the tax benefits they offer. At the time of writing, the following tax reliefs/benefits are available in the forestry sector:
- income tax – no income or corporation tax is payable on income generated from the sale of timber from the ownership of commercial woodlands;
- capital gains tax (CGT) – any increase in the value of a timber crop is exempt from CGT, if it has been managed as a commercial investment;
- rollover relief – for those who have a CGT liability arising from the sale of a business asset, the CGT liability can be deferred by investing in a qualifying asset such as timber; and
- business asset relief – commercially managed woodland qualifies for 100% business property relief if held for two years or more. On death, there is no inheritance tax payable on the total value of the land and trees. In addition, any CGT liability that has been rolled over (as noted above) will extinguish on death.
These tax benefits, coupled with historic increases in the price of timber and the UK’s position as a net importer of timber, have all fuelled significant rises in the values of forestry property. Currently, appetite appears to be strong for forestry as an asset in both stable and turbulent times.
Green building
Timber was in high demand prior to the COVID-19 pandemic. In a green recovery, continued investment into existing forests and plantation land will be crucial to ensure a sustainable supply of timber for construction and other industries. In the UK, the Committee on Climate Change recently recommended housing retrofitting and building climate-resilient new homes as key principles in order to rebuild a stronger and greener economy. This, combined with house-building targets, mean that the construction industry requires a steady flow of timber. As has been the case in recent times, it is likely a green recovery will focus on sourcing UK timber to ensure efficiency and sustainability.
Carbon offsetting
In the longer term, although the carbon efficiency of trees is undisputed, many see woodlands and forests as untapped in providing a much wider benefit by offsetting the carbon produced in many other industries. While carbon offsetting arrangements are still in their infancy, they offer considerable potential, both financially and in terms of long-term sustainability.
Prior to lockdown, we were actively advising landowners, charities and commercial entities on the various ways in which carbon offsetting arrangements may be implemented and facilitated, depending on their individual circumstances. There is now an opportunity for businesses to explore ways that their carbon emissions may be offset to ensure a buoyant green economic recovery from the coronavirus pandemic.
If you would like further information on the forestry sector, please get in contact with Stuart Greenwood or your usual Shepherd and Wedderburn contact.