HMRC updates to Biodiversity Net Gain: What farmers and landowners need to know

HMRC has published updated guidance on the tax treatment of payments for ecosystem services, including Biodiversity Net Gain (BNG) and Carbon Credits. The changes provide greater clarity for farmers and landowners considering environmental agreements, while also highlighting several important tax and planning considerations.

Our Private Client team outlines the key points of the new guidance, how such payments are likely to be taxed, and the key issues landowners should consider before entering into an agreement.

Overview

HMRC’s updated guidance confirms how it intends to treat payments made and received under BNG, Nutrient Neutrality, the Woodland Carbon Code, and the Peatland Code for tax purposes.

A similar approach is also likely to apply across other emerging land-based environmental markets

What relief is available for payments made?

The new guidance provides details on the tax implications of payments made under the schemes outlined above for both those making such payments and those receiving payments.

For property developers incurring costs to ensure BNG or nutrient neutrality (either on or off-site) as part of a development then the costs will generally be an allowable deduction for income tax or corporation tax purposes. There are however some exceptions to this if, for instance, the land is not held as trading stock.

Likewise, the purchase of carbon credits bought for the purposes of a trade should also be an allowance expense for income tax and corporation tax unless they are being purchased as an investment. Credits acquired as an investment will instead be a capital asset and subject to capital gains tax (or corporation tax on chargeable gains) on disposal with relief then being available for the purchase costs at that time.

What are the tax implications of receiving payments?

Generally, amounts received for ecosystem services will be taxable upon the landowner either as trading receipts or as a capital gain. This will depend upon the facts in each case but where amounts are received as part of an existing trade, usually this would indicate that the receipts will be trading income and likewise if they are received as part of a rental business then the payments received will be receipts of the property business. This will be an important distinction when the rates of tax are different for trading income than property income from April 2027.

For farmland, the guidance confirms that if the land on which the BNG units or credits were created is land used in a farming trade then if the land continues to be farmed then the receipts will form part of the farming trade and as such reliefs such as farmers’ averaging claims will apply to such income. If, however, the land is no longer farmed and the land no longer farmed is not a substantial part of the land on which the farming trade is carried on, then the receipts from ecoservices will not form part of the farming trade. This could have further implications for capital gains and inheritance tax reliefs.

The guidance also confirms that income and expenditure relating to units or credits created on land on which a commercial woodland is located will not be taxable or relievable. A commercial woodland is one managed on a commercial basis for the realisation of profit. This treatment therefore mirrors the current position for income and expenses from such woodlands.

As there is no equivalent exemption for peatland, income from sales of units relating to peatland will in most instances be a trading receipt and therefore subject to income tax or corporation tax.

Capital treatment is expected to apply only in limited circumstances, such as where a payment is made in compensation for the permanent loss or sterilisation of land.

Certain costs incurred by the landowner, including professional and legal fees, may be deductible for income tax purposes. Whether relief is available will depend on how the land is used and how the arrangement is structured.

What other tax issues should landowners consider?

The time at which the income will be recognised for tax purposes will depend on how the recipient usually accounts for their income and also on the nature of the payment itself. In some cases, the amount will be taxed on receipt (if accounts are prepared on the cash basis for example), whereas in other situations, the receipt will be spread over the term of the agreement. Where the income is spread in this way, care needs to be taken that sufficient funds are retained to cover the tax liability arising in future years.

It is also possible for ecosystem services to be “stacked” i.e. more than one type of payment received for the same land. In such cases, the new guidance clarifies that each type of payment needs to be considered separately for tax purposes.

Ecosystem services arrangements can create a number of wider tax implications, including:

• VAT
  • BNG units supplied by a VAT registered entity will be subject to VAT at the standard rate. However, sales of statutory BNG credits are outside the scope of VAT as they are sold under a special legal regime,
  • Carbon credits are generally within the scope of VAT but there are specific exemptions which are outside the scope.
• Inheritance tax, particularly the availability of Agricultural Property Relief where land is subject to qualifying environmental management agreements
• Stamp Duty Land Tax – the treatment of payments by a developer will depend on the exact nature of the transaction so advice will need to be taken on a case-by-case basis.

What does this mean in practice for farmers and estates?

For farmers, estates and other landowners, the updated guidance provides more clarity on HMRC’s view of the tax implications of such arrangements.

Ecosystem services such as creation of BNG units and carbon credits can provide opportunities for landowners to create a long-term income stream potentially allowing value to be generated from lower-performing or less productive land.

However, there are also risks associated with entering into such long-term agreements and the full implications should therefore be considered prior to signing an agreement

Key actions before entering a BNG agreement

1. Take advice early, as the tax treatment will depend heavily on the structure of the agreement
2. Review the payment profile carefully, including the timing of income and costs
3. Consider the wider impact on income tax, capital taxes and reliefs
4. Ensure legal, tax and land management advice is aligned
5. Model long-term cashflow and tax exposure before committing

How we can help

Environmental land use agreements can offer valuable opportunities, but they also require careful planning. As outlined above, the exact tax treatment will depend upon the facts in each case, so it is important that advice is taken.

At PKF Smith Cooper, our Rural team in Ashbourne can help you understand the tax treatment, assess the wider implications for your land and estate, and structure agreements in a way that supports your long-term objectives. Get in touch with the team today to see how they can help.

Contact details:

Catherine Desmond - Rural Business and Private Client Partner - 01335 343141

Natalie Pollard - Tax Director – 01335 343141

https://www.pkfsmithcooper.com/private-client-services/farms-and-landed-estates