The Last Tax Haven

Turning income into capital without taxation in this world is like trying to spin straw into gold, impossible unless you know Rumpelstiltskin.

Well as it turns out he and I are on quite friendly terms and it was he who introduced me to forestry investments.

Most governments are eager to support any activities that they regard as beneficial or that allow tax planning to continue if it delivers a public benefit.

So trees, which are beautiful, provide recreational amenities, are environmentally valuable and can be turned into various useful products, fall under both categories. Therefore a lot of countries will offer tax breaks to investors in forestry and/or allow tax efficient forestry investment to continue.

The catch and of course there always is one, is that in order to qualify for the tax benefits the forest must be maintained for several years (in the UK forests must be maintained for a minimum of two years) during this time the costs involved are deductible from taxable income.

The other stumbling block is that there is no income from the forest until it matures and this could take (depending on the tree specie) up to 10 years or more. What makes this only a stumbling block and not a six foot high concrete wall is the lump sum that you receive at the end of the investment. A lump sum that remains yours and not the taxman’s. At the very least the payment of tax will have been shifted to many years in the future and at best tax will be payable at a much lower rate than would have been due on the original income.

According to a study conducted by the Global Institute of Sustainable Forestry at Yale University investment in timber in 1989 came to $1 billion, by 2002 that had increased to $14.4 billion, the most recent year covered by that study. In addition according to the NAREIF Timberland Property Index between 1988 and 2003 annual returns from timberland reached 15%, outperforming both the bond and equity markets.

The forestry sector has continued to improve since then, just two years ago in 2008 investment returns from the forestry industry in the UK outperformed domestic commercial property and equities and produced a positive annual total return of 7%. It should be kept in mind however that this was during the height of the credit crisis and this performance is significantly lower than the record levels of 2006 and 2007.

The fall in timber prices in the last 12 months up to March 2009 marked the biggest price decline in the last decade and was the key driver behind lower returns.

Nonetheless, over a three-year annualized basis to end of 2008, forestry investment outperformed the three main asset classes, returning 19.3% per annum, while mid to long-term performance improved, returning 16.2% per annum in the five years to end of 2008 and 5.2% per annum since the start of the index back in 1992.