As of today (12 February), biodiversity net gain is mandatory for new planning applications for major development – 10 or more dwellings over a 0.5ha site area – made under the Town and Country Planning Act 1990 for England only.
These measures have been long awaited, and have been delayed from their initial planned introduction date of November 2023. What this means in practice is that developers will have to deliver a BNG of at least 10% to replace any biodiversity destroyed through the build. BNG for smaller sites does not come into force until 2 April 2024. Each local planning authority is in charge of regulation of its own BNG requirements, and some have chosen to mandate uplifts of more than 10%.
The developing marketplace
Developers are encouraged to look for “on-site biodiversity gains”, through either the creation of new habitats or the enhancement of existing habitats that are within the “red line” of the development. It is anticipated, however, that for many developments it will not be possible to achieve the required gain in biodiversity on-site, so developers will look to acquire registered off-site BNG units.
This is creating a new marketplace for landowners who now have the ability to potentially take an area of (potentially low-productivity) land out of agricultural use and create and sell BNG units to developers. The sale of a BNG unit is effectively an undertaking to take the appropriate steps to achieve an anticipated uplift in biodiversity on a site over a 30-year period.
There are a number of different “mechanisms” appearing in the marketplace for this, already ranging from direct sales from landowners to developers through to units being brokered and entities taking a legal interest in the land to “bank” the units for onward sale. Some developers are acquiring additional land so they can provide themselves with BNG. There are also a number of different legal structures which are evolving to set up the appropriate arrangements to allow landowners to sell BNG.
Almost all of these arrangements involve a large upfront payment to the landowner. Understandably, with the prospect of large cash receipts, how the sale of BNG units is treated for accounting and tax purposes is currently a hot topic.
Tax uncertainties
There is a lot of confusion in the marketplace over how BNG should be taxed. Many people are assuming that, because there is a large upfront receipt, this should be taxed as a capital receipt, but this is by no means necessarily the case. In many cases, all of the receipt should be taxed as income, albeit deferred over the course of the agreement as the funds are effectively an upfront payment for the provision of an ecosystem service.
There are other concerns for landowners over the future availability of agricultural property relief for inheritance tax over land put into BNG schemes. There is also confusion over the VAT treatment of the sale of BNG units owing to conflicting messaging coming from Defra and HMRC.
HMRC launched a consultation on the taxation of environmental land management and ecosystem service markets in March 2023. It was due to respond to this in autumn 2023, but it was announced in the Autumn Statement that its reply was being pushed back to “spring 2024”.
It is unlikely that this consultation will provide answers to all of the tax uncertainties that currently exist, but it will hopefully provide a clearer steer on some of the major issues. Disappointingly, the consultation excluded VAT from its scope, but we can be optimistic that further clarity on this will be provided in the coming months. In the meantime, landowners should do their utmost to understand and plan for the tax risks that come with these uncertainties.
The question as to how much, if any, of a BNG receipt is capital in nature is perhaps of lesser concern to commercial and many institutional landowners, as when taxed within a corporate vehicle the tax rate for both treatments (capital and income) is the same. There are scenarios where the distinction will make a difference, though. The accounting for BNG will still be a very important consideration for these sorts of landowners, the answer lying in the exact nature of the commercial arrangement entered into.
There will be occasions where BNG considerations form part of a wider landscape recovery scheme. These, by their very nature, will normally require the co-operation of multiple landowners, and some form of joint venture or profit-sharing arrangement will be needed. There are a number of different ways to achieve this, all of which have their own unique tax considerations and challenges. The best answer will depend on the varying tax drivers of the different landowners, be they corporate or private.
Impact on value
Important questions are also being raised about what impact entering into a BNG scheme will have on the long-term value of the land. It is likely that it will be difficult to return the land to other uses, either agricultural or for development, once the 30-year BNG period has come to an end. This may well have a heavily depreciative impact on the long-term value of the land.
There are some ways of increasing the monetisation of land going into a BNG scheme by ensuring that other “natural capital” income streams are looked at, such as payments for the sequestration of carbon. Claiming multiple sources of funding over the same area of land is known as “stacking”, but these additional income streams have to fall within the “additionality” rules, which essentially set out to prevent landowners being paid twice for the same thing.
The BNG regime promises to be a sizeable upshift in how the UK approaches the protection and restoration of biodiversity through its planning rules. While the industry awaits further clarity on the rules, landowners should be factoring in the potential tax implications to any calculations of the opportunities it presents for them to support new developments while also maintaining natural habitats for future generations.
Peter Harker is a partner in the land and rural practice group and head of natural capital at Saffery LLP
