Investing in forestry can increase your wealth in a tax-efficient manner

Forestry funds are receiving record amounts of money

Joining the rush makes sense, according to Terry Tanaka.

What could be more environmentally friendly than a tree? Forestry is clearly appealing to anyone looking to make sustainable investments. However, the appeal of investing in forestry extends well beyond its environmental credentials; long-term investors are also drawn to it due to the possibility of competitive returns and a wide range of tax benefits. Last year, record investments totaling hundreds of millions of pounds were made in UK forestry assets. A growing number of people are investigating forestry investment, either directly or through a professionally managed fund. Institutional investors, such as pension funds, family offices, and charities, contributed a portion of that money.

It sounds exactly like investing in forestry. You are purchasing ownership (or a portion of ownership) of either newly planted land or an established, mature woodland in a commercial forest. Alex Davies, the founder and CEO of Wealth Club, an investment platform targeted at high-net-worth and sophisticated investors, notes that as the trees grow, you should be able to profit from an increase in the forest's value. You can also make money by selling some of the trees for lumber. It's an investment for the long haul.

The returns have a very low tax rate. The increasing value of the trees is not subject to capital gains tax (CGT), but any increase in land value may be. Additionally, money received from the sale of timber is not subject to income tax. If you have owned your trees for at least two years, you will also benefit from favorable inheritance-tax regulations when transferring forestry investments after your passing.

Don't make forestry investments just for the tax rewards.

Making an investment solely for tax purposes is never a good idea, in part because chancellors have the power to alter tax laws, which reduces the value of incentives and reliefs. Nonetheless, forestry has a stellar performance record even after accounting for the effects of tax advantages. "UK forestry has a long-term goal. record of generating robust performance with comparatively low volatility, offering risk-adjusted returns higher than those of many conventional asset classes, according to Davies.

In fact, forestry has produced double-digit annualized returns over the last five, ten, and twenty-five years, making it the best-performing asset class in the UK. Additionally, since the first forestry fund was established in 2008, forestry funds in the UK have generated an average annual return of 11.4%. That is before the benefits of tax breaks, but after fees.

Naturally, past performance does not guarantee future success. However, forestry can also help you diversify your investments. Investment returns in forestry typically fluctuate independently of returns in other asset classes, such as the stock market; in technical terms, returns have little correlation with other assets. Therefore, forestry can be a great way to increase the overall investment strategy's resilience.

It is also considered a good inflation hedge because it is a tangible asset. Stronger economic growth periods tend to increase demand for timber as building projects pick up speed. As a result, during times of elevated inflationary pressure, timber prices typically increase, shielding investors from the depleting impact of inflation on their holdings.

In any event, forestry managers and funds have the option to decide not to sell any of their timber during times when timber prices are declining. Sitka spruce trees make up the majority of investable forests in the UK; these trees usually have a 15-year harvest window, so it's not necessary to cut them down in any specific year. Additionally, waiting means that there will be more timber to sell when the market appears more appealing because Sitka spruce typically adds about 5% of volume annually.

Forestry investment risks.

Notwithstanding these benefits, it's crucial to understand that investing in forestry also entails a number of serious risks. There is always a chance of capital losses, just like with any investment where prices can change. Returns will unavoidably differ and are strongly correlated with the performance of the UK construction industry. Investors may experience losses during slower, less predictable times in the building industry.

Being a natural asset that is so susceptible to environmental influences poses another risk. Although Sitka spruce is regarded as a hardy tree species, it is susceptible to issues like disease, wind damage, and forest fires. Additionally, there is no coverage for disease; in the worst case, your investment might be completely lost. Trees can be insured against the risk of fire and storms.

Since forestry is a physical asset that can be challenging to trade, liquidity risk may be the largest concern for many investors. If you directly own a forest, it may take months or even years to find a buyer so you can realize the full value of your investment. There might be a predetermined time frame for capital return if you invest through a fund; in the interim, the manager might run a secondary market to assist investors in withdrawing their money early, but there are no guarantees. Consider forestry, at the very least, as a ten-year investment.

Therefore, investors who are uncomfortable with risk and illiquidity shouldn't consider this asset class. However, according to Davies, forestry will continue to be popular and might even benefit more from recent tax announcements. For many years, knowledgeable, tax-efficient investors have favored forestry. Additionally, since the government increased the inheritance-tax-free business property relief, its appeal is probably going to grow. More investors were joining the market even prior to the chancellor's Christmas intervention. For its Forestry Fund VI fund, which closed to new investors last year, Gresham House, one of the most reputable forestry investment managers in the UK, raised 375 million. That was the biggest forestry fundraising event in UK history. In April, Gresham House intends to introduce a new car.

Anthony Crosbie Dawson, director of forestry and private clients at Gresham House, states, "We've had a lot of interest from private-client investors, but we also have an increasingly institutional client base." Since institutions are not eligible for the same tax breaks as individuals and cannot invest for that reason, he views that as a vote of confidence in forestry investment. According to Crosbie Dawson, "we raised from UK institutions, but also from international investors, one of our fund investors was a Japanese institution, for example." A "

For the majority of retail investors, the collective-fund approach makes sense because it gives them access to professional forestry management expertise and diversification managers who will invest across multiple forests and woodlands with significantly lower minimum investment requirements. In addition to requiring an initial investment of hundreds of thousands, if not millions, of pounds, purchasing your own commercial forest will require you to either manage the woodland yourself or hire a manager. Funds, on the other hand, usually require minimum investments of about £50,000.

That is undoubtedly still a substantial amount, and according to Financial Conduct Authority regulations, only sophisticated or wealthy investors may contribute to forestry funds; however, this is a more accessible entry point than making direct investments.

The other well-known name in UK forestry, Par Equity, is currently a part of PXN Group and has already raised two funds. Par Forestry III, the company's third vehicle, is scheduled for official launch soon and aims for an average yearly return of 7% after charges. In a recent interview on the Wealth Club platform, which offers access to forestry funds, Paul Atkinson, investment manager at Par Equitys, stated, "The historic long-term returns from forestry have been extremely good." Because of worries about climate change, "there's increasing interest in the asset class and it's also completely uncorrelated with other capital markets and a pretty good hedge against inflation."

The removal and storage of carbon dioxide from the atmosphere can be achieved through more than just planting trees and maintaining forestry, though this is crucial. (In fact, carbon credits from government initiatives to boost carbon sequestration may provide additional revenue for certain forestry funds. Additionally, compared to steel, concrete, and other materials that the UK construction industry has historically relied on, timber is far less carbon-intensive. Another significant client is the packaging sector, which aims to lessen its environmental effect by switching from plastic to recyclable materials.

The overall image is appealing.

In this regard, the overall outlook for timber prices is positive, as industry buyers are likely to increase demand even if overall activity levels in their sectors stay relatively flat. There will be short-term fluctuations; prices dropped by about 5% in the last quarter of 2025, their first drops in two years, mostly due to supply issues. However, there shouldn't be a shortage of clients as homebuilders, for instance, begin to use more wood in order to meet the UK's ambitious new-home targets.

For investors, it's not like timber prices are everything. "As with all commodities, the price of timber can be volatile, though it's much less volatile than some, but there's actually not much correlation with the value of the asset because we own the land as well as the trees," says Crosbie Dawson. Because forest valuations are based on discounted cash flows over a rotation of 35 to 40 years, the price of timber today or in six or twelve months is not very important. In light of this, Gresham House has predicted that the world's demand for timber will nearly double over the next 20 years, which is encouraging for investors thinking about forestry. According to Crosbie Dawson, "people do want more of their portfolios allocated to sustainable assets, but only if those assets are delivering compelling returns."

More positive news for forestry investment is the Reeves inheritance-tax U-turn.

The government's recent reversal on business property relief (BPR) and agricultural property relief (APR) may be one factor contributing to the resurgence of interest in forestry investment. This will increase the attractiveness of forestry as a tool for inheritance tax (IHT) planning families. The two reliefs function similarly, enabling owners of a variety of business assets to transfer these assets to their heirs without incurring any IHT obligations, provided that they have owned the assets for at least two years at the time of death. Chancellor Rachel Reeves introduced BPR and APR reforms in her first budget in the fall of 2024; starting in April 2026, she declared that only assets valued at 1 million would be eligible for 100% relief, with any excess receiving only 50%. Farmers who were concerned that they would not be able to pass on family farms to the next generation due to their children's inability to pay the tax bill launched a massive backlash.

Since the cap can be transferred between spouses and civil partners, the chancellor backed down in December and announced that she would raise the original 1 million threshold to 2.5 million or 5 million for couples. This is good news for both forestry investors and farmers impacted by the initial proposals, as the majority of woodland and forestry investments qualify as assets for BPR. Therefore, from the perspective of IHT planning, the chancellor's decision significantly raises the appeal of forestry.