How to make money grow on trees
Is forestry a good commercial investment? Is it a good way to provide for your pension? What tax breaks are available? And where do you start to get advice about investing in forestry?
According to the Forest Service, the regulatory authority for forestry in Ireland based at the Department of the Marine and Natural Resources, profits made by an individual or a company from a commercial forest are exempt from income tax and corporation tax. Company distributions from exempt profits on commercial forests are also tax exempt.
Moreover, gains on the disposal of felled timber from commercial woodlands do not incur capital gains tax. So, when an individual disposes of woodlands, although capital gains tax is charged on the lands, it is not charged for the trees growing on the lands. And if a person receives capital from an insurance policy following damage or destruction of trees, it is also free from capital gains tax.
Mr Paul Brosnan of the Dun Laoghaire-based Irish Forestry Funds said investment in forestry compared "relatively favourably" with a pension fund. "The difference is that the tax break for the pension comes in year one because you get a tax credit for the amount you put in. With forestry you get a tax-free lump sum at the end of the period.".
The seventh Irish Forestry Fund is starting this month. "It'll be the last fund in its current format. We are looking to amalgamate all the funds and list them on the Dublin Stock Exchange. That's our intention over the next 12 to 18 months," Mr Brosnan added. While the real rate of growth of the seventh fund is expected to be about 7.5 per cent, the return from forestry is declining "because the price of land is increasing and has increased since we first launched the funds. So there obviously comes a point at which we have to look at the rate of return and our ability to give a premium rate." The fund is essentially a co-operative of individuals. "Prior to its establishment, somebody who wanted to invest in Irish forestry would need to spend about £80,000, because to get a commercially viable plantation they'd need to purchase about 40 acres and manage that on an on-going basis. So that precluded quite a sizeable proportion of the population on the basis that that £80,000 was going to be tied up for approximately 30 years.
"By unitising it into personal shares of £500 it opened up the market to a much wider audience. Hence, we have in excess of 5,000 individual shareholders in the Irish Forestry Funds. We created a new investment and it has been hugely successful."
Some £1.5 million is being raised for the seventh fund, pooled in units of £500. This will purchase land subject to the approval of the Forest Service, which approves land for planting subject to strict criteria.
Each fund is set up as a separate public limited company. While the shares aren't listed on any stock exchange, they are fully transferable and marketable. "Because we are not a stockbroking firm, we are not authorised to trade shares on behalf of shareholders but we do have a matching facility. From time to time, we would have a list of individuals who wish to purchase shares in the funds.
"If a shareholder wishes to sell his shares, we put them in contact with somebody who wishes to purchase them and it's up to them to negotiate a price, usually based on the last set of annual accounts for that particular fund."
In the sixth fund, each £500 share was worth some £16,000 on a projected basis. "This is a longterm investment," Mr Brosnan said. Most people invest approximately £1,500 and hold on to their shares for the 30-year period.
Mr Brendan Lacey, chief executive of Irish Forestry Unit Trust (IFUT) said lay people cannot invest directly in IFUT. Investors have to go through a managed pension fund with one of the fund managers. However, individuals with their own Revenue-approved pension schemes could approach IFUT directly.
Historically, forestry has achieved between 5 and 7 per cent per annum above inflation, he says. Equity markets generally give a higher long-term return "but they're far more volatile. Forestry will give you a very steady long-term rate of return with very low volatility."
On tax, he says "For the private individual, you can't offset any tax losses against investment in forestry - but all your profits at the end of the average 40-year rotation will be tax-free.