Citola Blog
Woodland Investment: Show Us The Assets!
As promised, we’ve been monitoring at the prospects for the UN Cancun conference, and will report back later in the week. By the way, if you hear a funny noise as you’re reading this – something like cicadas calling softly into the night air – it’s probably the sound of people slithering off the record. Nevertheless, we’re beginning to see a pattern as expectations solidify, and we’ll report back later in the week.
In the meanwhile, we thought we’d take a look at something which is less subject to facile political pronouncements than the orgy of posturing that surrounds the UN climate talks. We’re talking about the personal taxation of woodlands and forestry.
This varies from country to country, of course. For the purposes of this blog, we’ll restrict ourselves to the United Kingdom. Many Citola shareholders are based in the UK, and we thought we’d put forward the investment arguments for forestry as an asset class. Whether or not the UN agrees a new protocol to follow Kyoto (we see the mess this issue has created in Brazil, where reform is a political football), whether or not there’s a carbon-offset bonus to be had (we note how the European Union is dithering on carbon taxation generally), whether or not there are tax incentives for arrested deforestation and reforestation (REDD) projects, one thing is true: forestry is a respected and valued asset class in many countries across the world.
A UK investor going into forestry has a number of financial advantages. First off, woodlands are benignly treated under the terms of Britain’s Inheritance tax (IHT). IHT is designed to curb the creation of dynasties. Wealth can cascade down the generations, but the state wants a share, and takes it using IHT.
We won’t belabour you with boring fiscal detail here, but the fact is that IHT means that someone leaving a two-bedroom flat in a moderately prosperous part of London is also leaving a tax bill. The inheritors might have to sell a flat to pay the bill, since the threshold at which the tax kicks in is £325,000. But forestry is well treated: the tax bill can be deferred through what’s called “rollover relief”. As long as you hold the asset, the tax isn’t payable. So fiscal policy here has a conservationist, green tinge to it.
The Capital Gains Tax (CGT) position is under review right now, as the UK government debates its first Budget under the new Conservative-Liberal Democrat coalition government. The good news is that the new administration is well disposed to forestry investment, and is being kind to entrepreneurs who build businesses. The general thrust of policy seems to be that CGT will be charged at low rates to those who – excuse the vagueness - make things better (entrepreneurs and forestry investors seem to come into this category). The legislation is still being debated, and we are watching carefully.
The Income Tax (IT) treatment of short-term (under ten years) timber croppers is interesting. It’s treated as trade income, but this is beneficial in many ways, as the expenses of culling the timber can be offset against income.
And now you’re wondering how this isn’t political – well, of course, it is. But the benefits are real, and locations such as the UK play pretty fair and don’t change tax laws retrospectively.
It would be wrong to be premature on this one, but we are looking very closely at this area and this country. The UK is very much a space to watch.
Perhaps a suggestion for the
Perhaps a suggestion for the slogan of the next COP conference...
"... something less subject to facile political pronouncements than the orgy of posturing that surrounds the UN climate talks"
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