Biodiversity units and nutrient credits: key tax points for landowners and developers 

Environmental markets are developing quickly. Biodiversity net gain (BNG) and nutrient neutrality are now an important part of the planning and development process. They also create opportunities for landowners to generate income from land used for environmental purposes. 

The tax treatment, however, is not always straightforward. HMRC has published a technical note on the taxation of ecosystem services, including BNG and nutrient credits. The note does not introduce a new tax regime. Instead, HMRC applies existing tax principles to these newer arrangements. That means the tax position will depend on the facts, including how the land is used, what rights are granted, how the agreement is structured and whether the activity forms part of a trade, property business or capital asset. 

In simple terms, a landowner may agree to create or enhance habitats on land and, in return, receive payments from developers who need biodiversity units or nutrient credits to satisfy planning requirements. The arrangement can create a long-term income stream, but it will often involve restrictions on future use of the land. 

This article focuses on BNG and nutrient neutrality. It does not cover the Woodland Carbon Code, the Peatland Carbon Code or wider carbon credit arrangements. 

What are BNG and nutrient neutrality? 

BNG is mandatory in England under Schedule 7A of the Town and Country Planning Act 1990. Developers must deliver at least a 10% improvement in biodiversity. This can be achieved on-site, through off-site biodiversity units, or, as a last resort, by buying statutory biodiversity credits from government. Off-site BNG units are usually secured through a section 106 agreement or conservation covenant and must generally be maintained for at least 30 years. 

Nutrient neutrality applies in affected river catchments and protected habitat sites where nutrient pollution is an issue. In broad terms, development must not cause a net increase in relevant nutrients, such as nitrogen or phosphorus. Nutrient credits must usually be within the same catchment and are intended to mitigate the specific development to which they are allocated. They are not generally tradeable by the purchaser in the same way as some carbon credits. 

For landowners, both regimes may provide a new income stream. In return, the landowner usually takes on long-term land management obligations. BNG arrangements are commonly for at least 30 years. Nutrient mitigation arrangements may be longer, often around 75 years, although shorter interim arrangements may be used in some cases. 

Are receipts taxed as income or capital? 

For landowners, one of the main questions is whether payments are taxed as income or capital. 

HMRC’s starting point is that most ecosystem service payments will normally be taxed as income, often as trading income. For example, this may be the case where the land remains part of an existing farming or other land-based trade, or where the landowner’s activities amount to the commercial occupation of land. In some cases, payments may instead be property income, for example where a landlord receives payments linked to ecosystem service income under lease arrangements. 

Capital treatment may be possible, but it is likely to be limited. HMRC indicates that capital treatment may arise where payments compensate for the loss of use of land or the permanent sterilisation of an asset. However, the fact that an agreement is long term does not, by itself, mean the receipt is capital. In many cases, the arrangement is likely to be viewed as an ongoing commercial use of land rather than a disposal of a capital asset. 

What about developers? 

For developers, the main issue is whether the cost of acquiring units or credits is deductible. 

Where the developer holds land as trading stock and the expenditure is incurred as part of a trading development activity, the cost will generally be deductible if it is required by a local planning authority or other competent authority. Where the land is not held on trading account, HMRC indicates that the expenditure will not usually be deductible against income. It may, however, be relevant to a future capital gains tax calculation if the relevant conditions are met. 

Landowner costs 

Establishing and maintaining environmental projects often involves significant expenditure. This may include habitat creation and management costs, ecological surveys, legal fees relating to section 106 agreements or conservation covenants, and professional tax advice. These costs may be deductible where they are revenue expenses of the relevant trade or property business. If they are not deductible against income, they may instead form part of the base cost of the land for capital gains tax purposes.  

Landowners should therefore be cautious about assuming that entering into a long-term environmental arrangement will automatically lead to capital treatment or take receipts outside the scope of income tax or corporation tax.

VAT and SDLT 

VAT should be considered at the outset. Supplies of biodiversity units are likely to be subject to VAT where they are made by a VAT-registered business in the course of its business. If the agreement is silent, the price may be treated as VAT-inclusive, reducing the seller’s net return. Clear VAT drafting is therefore essential. 

SDLT should also be checked. A simple agreement to supply units or credits may not itself involve a land transaction. However, SDLT may become relevant where the wider structure includes a lease, easement, option or other chargeable land interest. 

Inheritance tax 

Long-term environmental arrangements can affect inheritance tax planning. Agricultural Property Relief may be available for land managed under qualifying environmental agreements with, or on behalf of, the UK Government, devolved governments, public bodies, local authorities or approved responsible bodies. Business Property Relief may also be relevant where the land forms part of a trading business, but it should not be assumed. The position depends on the land, the agreement and the wider ownership structure. 

Practical points 

BNG and nutrient neutrality arrangements should be reviewed carefully before terms are agreed. In particular, landowners and developers should consider: 

• whether receipts are income or capital; 

• whether costs are deductible; 

• whether VAT has been dealt with clearly; 

• whether SDLT is relevant; 

• how the arrangements affect inheritance tax and succession planning; and 

• whether multiple environmental credits are being generated from the same land. 

How we can help 

BNG and nutrient neutrality can create valuable opportunities, but the tax position depends heavily on structure and drafting. Early advice can help landowners and developers manage tax risk, protect commercial returns and align environmental projects with their wider objectives.