Compulsory biodiversity net gain arrives in November. All new development will have to demonstrate how a net gain in biodiversity values of at least 10% will be achieved before work can start. This is just one of many natural capital opportunities becoming available to rural landowners and managers. New opportunities will come in a variety of forms. The parties involved may be individuals, companies, trusts, government agencies or others. Carbon offsetting, nutrient neutrality and corporate ESG will all drive new initiatives. Government environmental land management schemes will stimulate others.
The legal instruments used to secure new deals will also take a range of different forms. These will include the new conservation covenants (Part 7 of the Environment Act 2021) which are now in force, albeit still lacking some of the elements, such as a list of approved bodies and a functioning registry. All these elements will have a bearing on tax treatment. Taxation questions may also be important in shaping transactions.
Inheritance tax, particularly the threat of losing agricultural property relief, has dominated the headlines – but that is not the only tax question.
Inheritance tax
The two reliefs that would appear to be most vulnerable when farmland is diverted to a natural capital opportunity are APR and business property relief. Will the land continue to qualify as “agricultural land and property” for APR purposes? Is there a danger that reduced farming activity could call into question the “character appropriateness” of farmhouses? Will the intensity of business activity be sufficient for BPR purposes? For example, there have been recent tribunal cases where furnished holiday lettings have failed to pass the threshold of being more than an investment business despite a considerable management effort, whereas commercially managed woodland with similar levels of management or less seems to have no problem.
Commissioners for HM Revenue and Customs v Brander (as executor of the will of the late fourth Earl of Balfour) [2010] UKUT 300 (TCC) demonstrated the value of an overall estate approach in which the majority activity qualifies for BPR, thus enabling the relief to “wash over” the entirety of the estate. Many estates have taken steps to “Balfour-proof” their management in the light of this decision. Will engagement in natural capital opportunities change the balance? The answer is likely to vary from one estate and opportunity to another, considerably.
Failure to recognise the inheritance tax risk could cost up to £4,000 per acre on farmland of medium value, the difference between no inheritance tax at all after relief and the 40% rate on the full market value of the land.
Income tax and capital gains tax
Some natural capital payments may take the form of a one-off payment to recognise a commitment that may last for many years: BNG planning agreements for 30 years for example, or nutrient neutrality agreements for even longer. These may cause problems for income tax, which does not cover capital receipts. Some accountants argue the receipt is simply a huge pre-payment and will be dealt with as such between the profit and loss account and the balance sheet. HMRC’s own guidance underlines the point that it may not be as simple as this when it comes to distinguishing a capital receipt from a revenue receipt.
A payment of this nature may come within the scope of CGT, in which case it will almost certainly amount to a part-disposal of an interest in property as well, triggering a number of related valuation requirements.
Value added tax
There are also questions about the VAT status of natural capital receipts, neatly illustrated by the current HMRC guidance on payments for carbon. Payments in the voluntary carbon market (eg the Woodland Carbon Code) are regarded currently as outside the scope of VAT, so it does not apply (a similar treatment to government grants). Transactions in the mandatory market (ie the UK Emissions Trading Scheme) are, however, regarded as chargeable at the standard rate. The VAT status of other transactions remains debateable. Are they a transfer of an interest in land? Exempt. A provision of a service? Chargeable at standard rate unless specifically covered by one of the lower bands, eg food production at zero rate. Or, like voluntary carbon, outside the scope of VAT altogether?
Stamp duty land tax
The Finance Act 2003 makes it clear that SDLT is chargeable on land transactions. The creation of a conservation covenant, for example, would in all respects seem to be clearly a land transaction. The applicable rate would be that for non-residential property in nearly all cases. Similar rules apply in Wales and Scotland.
Rating
Agricultural land is exempt from rating, as defined in Schedule 5 of the Local Government Finance Act 1988. Some land diverted to natural capital opportunities may well continue with an agricultural use and stay within the exemption. But equally there may be examples of new uses which fall well outside the scope of the exemption, triggering a potential rate liability.
Dogs and their tails
There are currently more questions than answers over the tax treatment of natural capital and ecosystem service commercial opportunities.
Doubts over taxation treatment add to the risk when looking at new opportunities. Should this stop us in our tracks? The rational response is almost certainly to plan based on the worst assumptions about the taxes and rates which may apply. Does the project still look worthwhile on this basis?
Landowners and managers will clearly need a lot of help to work through the consequences, tax and beyond, for contractual commitments which may extend beyond a lifetime and become binding on future generations and owners.
Charles Cowap is a rural practice chartered surveyor and chartered environmentalist
