Investing in forestry: a tax-efficient way to grow your wealth

What could be greener than a tree? For anyone interested in sustainable investment, forestry has obvious appeal. But the allure of investing in forestry goes well beyond its environmental credentials: the potential for competitive returns and a generous range of tax incentives are also turning the heads of long-term investors. UK forestry assets drew record investments last year, attracting hundreds of millions of pounds. Some of that money came from institutional investors, including pension funds, family offices and charities, but there are also a growing number of individuals exploring forestry investment, either directly or through a professionally managed fund.

Investing in forestry is exactly what it sounds like. You’re buying ownership of a commercial forest (or a share of ownership) – either a mature, established woodland, or newly planted land. As the trees grow, you’ll hopefully makecapital returns from an increase in the value of the forest; there’s also an opportunity to generate income by selling some of the trees for timber, as Alex Davies, the founder and chief executive of Wealth Club, the investment platform aimed at high-net-worth and sophisticated investors, points out. It’s an investment for the long term.

The returns are highly tax-efficient. There’s no capital gains tax (CGT) to pay on the rising value of the trees, although any rise in land value is potentially subject to CGT. And there’s no income tax due on revenue generated from sales of timber. You’ll also benefit from generous inheritance-tax rules when passing forestry investments on following your death, as long as you’ve owned your trees for at least two years.

Don’t invest in forestry for the tax benefits alone

It’s never a good idea to make an investment purely for tax reasons, not least since chancellors can – and very often do – change the tax rules, diminishing the value of incentives and reliefs. However, even after the impact of tax benefits, forestry has an impressive performance record. “UK forestry has a long-term… record of producing strong performance with relatively low volatility, therefore providing risk-adjusted returns that are in excess of many traditional asset classes,” says Davies.

Indeed, forestry is the UK’s best-performing asset class over the past five, ten and 25 years, delivering double-digit annualised returns over each of these periods. And forestry funds in the UK have produced an average annual return of 11.4% a year since 2008, when the first such fund was launched. That’s after fees, but before the positive impact of tax reliefs.

Past performance, of course, is no guarantee of the future. But forestry is also useful as a way of diversifying your portfolio. Returns from forestry investments tend to move independently of returns from other asset classes, including the stock market; in the jargon, returns have low correlations with other assets. Forestry can, then, be an excellent way to boost the resilience of your overall investment strategy.

It is also a tangible asset that is regarded as a good inflation hedge. Demand for timber often increases during stronger periods of economic growth, as construction projects accelerate. Timber prices, therefore, tend to rise during periods of increased inflationary pressure, protecting investors from the eroding effect of inflation on their portfolios.

In any case, during periods when timber prices are lower or falling, forestry managers and funds can simply choose not to sell any of their timber. Most investable forests in the UK largely comprise Sitka spruce trees; there is typically a 15-year window to harvest these trees, so there’s no need to cut them down in any particular year. And since Sitka spruce tend to add around 5% of volume each year, waiting means there’s more timber to sell when the market looks more attractive.

The risks of investing in forestry

Still, despite these plus points, it’s important to recognise that investing in forestry also carries some significant risks. As with any investment where prices can rise or fall, there’s always the possibility for capital losses. Returns will inevitably vary – and are closely linked to the fortunes of the UK’s construction sector. During slower periods for the building trade – which aren’t always predictable – investors may see losses.

Another risk is that this is a natural asset and so vulnerable to environmental factors. Sitka spruce is considered a hardy type of tree, but it’s not immune to problems such as forest fire, wind damage, or even disease. And while it’s possible to insure trees against the risk of fire and storms, there is no cover available against disease; in the worse-case scenario, your investment could be wiped out entirely.

Perhaps the biggest issue of all for many investors will be liquidity risk – forestry is a physical asset that can be difficult to trade. If you own a forest directly, you’ll need to find a buyer when you want to realise the value of your investment, and that may take months, or even years. If you invest through a fund, there may be a set time period for return of capital; in the meantime, the manager may operate some sort of secondary market to help investors get out early, but there are no guarantees. At the very least, think of forestry as an investment you’ll hold for at least ten years.

This is, therefore, not an asset class for investors who feel uncomfortable with risk and illiquidity. Forestry will, though, continue to prove popular and potentially get even more of a boost from recent tax announcements, says Davies. “Forestry has long been a favourite among tax-efficient investors in the know. And its appeal is likely to increase now that the government has upped the inheritance-tax-free business property relief.” Even before the chancellor’s Christmas intervention, more investors were getting on board. Gresham House, one of the UK’s most established forestry investment managers, raised £375 million for its Forestry Fund VI fund, which closed to new investors last year. That was the largest fundraising in forestry ever conducted in the UK. Gresham House now plans to launch a new vehicle in April.

“We’ve had a lot of interest from private-client investors, but we increasingly have an institutional client base too,” says Anthony Crosbie Dawson, director of forestry and private clients at Gresham House. He sees that as a vote of confidence in forestry investment, since institutions don’t qualify for the same tax reliefs as individuals and therefore can’t be investing for that reason. “We raised from UK institutions, but also [from] international investors,” says Crosbie Dawson – “one of our fund investors was a Japanese institution, for example.”

The collective-fund approach makes sense for most retail investors, who get access to professional forestry-management expertise and diversification – managers will invest across multiple forests and woodlands – as well as much lower minimum investments. Buying your own commercial forest is likely to require an upfront investment of hundreds of thousands – and often millions – of pounds, plus you’ll need to manage the woodland yourself, or appoint a manager. By contrast, funds typically have minimum investments of around £50,000.

Clearly, that’s still a significant sum – and Financial Conduct Authority rules only allow forestry funds to take money from sophisticated or high-net-worth investors – but it’s a more accessible entry level than investing directly.

Par Equity – now part of PXN Group – is the other major name in UK forestry, having raised two funds already. The formal launch of its third vehicle, Par Forestry III, is expected soon, and is targeting an average annual return of 7% after charges. “The historic long-term returns from forestry have been extremely good,” said Par Equity’s investment manager Paul Atkinson in a recent interview on the Wealth Club platform, which provides access to forestry funds. “It’s also completely uncorrelated with other capital markets and a pretty good hedge against inflation and, of course, there’s increasing interest in the asset class” due to concerns about climate change.

It’s not just that planting trees and maintaining forestry is a good way to remove carbon dioxide from the atmosphere and store it, although this is important. (Indeed, some forestry funds may generate extra income from the carbon credits available from government schemes aiming to increase carbon sequestration.) It’s also that timber is far less carbon-intensive than steel, concrete and other materials that the UK construction industry has traditionally depended on. The packaging industry, also looking to reduce its environmental impact by moving away from plastics towards recyclable materials, is an important customer too.

The big picture is attractive

In that sense, the big-picture outlook for timber prices is encouraging, with increasing demand from industry buyers likely even if overall levels of activity in their sectors remain relatively flat. There will be short-term ups and downs – prices fell 5% or so in the final quarter of 2025, their first declines for two years, largely because of supply factors – but as homebuilders, for example, start to use more timber, and to work towards the UK’s ambitious new-homes targets, there should be no shortage of customers.

Not that timber prices are the be-all and end-all for investors. “The price of timber can be volatile, as with all commodities, although it’s a lot less volatile than some, but there’s not actually much correlation with the value of the asset because we own the land as well as the trees,” explains Crosbie Dawson. “Forest valuations are based on discounted cash flows over a 35-to-40-year rotation, so what the timber price is today, or in six or 12 months’ time, is not particularly relevant.” In that context, Gresham House has forecast a near doubling in global demand for timber over the next 20 years, providing an encouraging backdrop for investors considering forestry. “People do want more of their portfolios allocated to sustainable assets, but only if those assets are delivering compelling returns,” says Crosbie Dawson.

Reeves’ inheritance-tax U-turn is more good news for forestry investment

One potential driver of the renewed interest in forestry investment is the recent government U-turn on business property relief (BPR) and agricultural property relief (APR). This will enhance the appeal of forestry as a tool for families planning for inheritance tax (IHT). The two reliefs work in the same way, allowing the owners of a wide range of business assets to pass these assets on to their heirs with no liability for IHT, as long as they’ve owned them for at least two years on death. In her first Budget, in the autumn of 2024, chancellor Rachel Reeves unveiled reforms of BPR and APR; from April 2026, she announced, only the first £1million worth of assets would qualify for the reliefs at 100%, with any excess getting only 50% relief. That prompted a huge backlash from farmers worried that they would no longer be able to hand family farms down to the next generation because their children wouldn’t be able to pay the tax bill.

In December, the chancellor backed down, announcing that she would raise the planned £1million threshold to £2.5million – or £5million for couples, since the cap can be transferred between spouses and civil partners. That’s good news for farmers affected by the original proposals – but also for investors in forestry, since most investments in woodland and forestry are qualifying assets for BPR. The chancellor’s decision therefore, substantially increases the attractiveness of forestry from the point of view of IHT planning.

This article was first published in MoneyWeek’s magazine. Enjoy exclusive early access to news, opinion and analysis from our team of financial experts with a MoneyWeek subscription.