Budget 2023: Consultation on the taxation of environmental land management schemes

The recent Spring Budget considered a number of wider environmental issues but most importantly, delivered a consultation and call for evidence on the tax treatment of the use of land for environmental schemes. This builds on the Government’s previously announced wider policy objectives to achieve ambitious targets for the environment and climate.

The consultation will come as welcome news for those considering diversification into Natural Capital as a source of income – from developers looking for land on which to offset their environmental obligations, but also as part of a farm or estate’s own environmental and sustainability strategy.  However, when land comes out of agricultural use for say, the creation of a wildflower meadow or nature reserve, it ceases to qualify for Agricultural Property Relief (APR) which may effectively act as a barrier preventing landowners making long term land usage change from agriculture to environmental.

The new consultation, which runs until 9 June 2023, looks at two aspects.

Part one of the consultation is a “call for evidence” on the commercial operation of the production and sale of ecosystem service units (including the Woodland Carbon Code, UK Peatland Code and Biodiversity Net Gain) and the uncertainties in their tax treatment, including Income tax, Corporation tax, Capital Gains Tax, Stamp Duty Land Tax and VAT. A key aspect of this is how the sale of the units are accounted for and recognised from a tax perspective – for example, should receipts be classed as income or capital (rent or premium), with the resultant differences in the applicable taxes?

Part two considers the reform of APR and in particular:

– the expansion of APR to allow for non-agricultural land stewardship schemes; and- restricting the availability of APR on let land so that landowners would only get 100% relief where the tenant has an interest of at least eight years (in line with suggestions made in the Rock Review).

At present, APR is available on the agricultural value of land that is owned and occupied for the purposes of agriculture for two years if occupied by the owner, their spouse or a company controlled by them or seven years if occupied by another (i.e. let land). Broadly speaking, where land is occupied by the landowner or let on a tenancy post 1 September 1995, 100% relief is currently available. A lower rate of relief at 50% is available in other circumstances.

Agricultural property means agricultural land or pasture (and following the Spring Budget, now restricted to UK land only). It also includes woodland and any building connected with the intensive rearing of livestock/fish if the woodland or building is occupied with the agricultural land, and that occupation is ancillary. This covers, for example, woodland shelter belts. Woodlands managed for commercial timber or amenity woodlands that are not occupied for agriculture, do not qualify for APR but may qualify for Business Property Relief (BPR) or Woodlands Relief. 

Under the current rules, APR is limited to the value of agricultural land, although farming businesses may also benefit from BPR. 100% relief is available for business interests in privately owned trading businesses, for example, a solely owned farming business or a partnership interest (if the overall business is not one of wholly or mainly making or holding investments). 50% relief is available for land and buildings used by a business the deceased was a partner in, or a company they controlled. 

Changes made by landowners to move land out of agricultural production into environmental land use could lead to a loss of valuable IHT relief and the purpose of the consultation document is to explore the possibility and challenges of expanding APR to support the Government’s overall policy objective to pay farmers and land managers to provide environmental goods and services alongside food production.

There are already a number of specific habitat management schemes that have expressly been deemed agricultural land and brought into the scope of APR through legislation, including the creation of salt- marshes, former set aside land and water fringes, so it is possible that the Government may seek to do similar for Environmental Land Management schemes.

Whilst the consultation document raises interesting points for discussion, any reform of APR which would lead to the availability of relief on land used for environmental purposes that has never been used for agriculture would seem unlikely given the consultation document highlights HMRC concerns over unintended consequences of any extension to APR. 

The Government being committed to supporting investment in nature is clear from the scope of the consultation, but concern remains over the speed in which any new IHT policy will be put in place to support landowners moving into ELMS and any privately funded Natural Capital projects.. That said, it is encouraging to note that confirmation has now been published in HMRC’s IHT manual that land used in Woodland Carbon Code Schemes and the Peatland equivalent is capable of qualifying for BPR in its own right. This brings welcome clarity for landowners seeking to exploit such opportunities on their land.

If you would like further information on the taxation of land and the impact of diversification into Natural Capital, please contact Emily O’Donnell or Gavin Birchall. The team specialises in advising Landowners on all aspects of the tax surrounding Natural Capital schemes – in particular, succession planning, including inheritance tax mitigation and particularly agricultural and business reliefs, capital gains tax, VAT, Stamp Duty Land Tax and business rates.