What does the Spring budget mean for Agricultural Property Relief?
7 March 2024
One of several barriers for landowners looking to exploit Natural Capital opportunities on their land has been the lack of certainty over the tax implications of the long-term commitment of land for Biodiversity Net Gain (BNG) and other environmental land uses. Importantly for many, was the concern that by changing the use of their land, landowners would potentially affect the availability of inheritance tax reliefs and primarily, Agricultural Property Relief (APR).
In order for land to qualify for APR it needs to be used for the purposes of ‘agricultural production’, along with other requirements. If land is taken out of agricultural production for environmental schemes there is a real concern that in many cases this will mean that the landowner will lose the availability of APR and/or Business Property Relief.
Following a recent government consultation on the “taxation of environmental land management and ecosystem service markets”, the Chancellor Jeremy Hunt announced in the Spring Budget delivered yesterday, that the Government will extend the existing scope of APR to land managed under an environmental agreement with, or on behalf of, the UK Government, Devolved Administrations, public bodies, local authorities, or approved responsible bodies. The relief will be available for lifetime transfers and transfers on death from 6 Aril 2025 where there is an agreement in place for the land management scheme on or after 6 March 2024 (or an agreement entered into before 6 March 2024 which remains in place).
This is potentially a huge change for many farmers and landowners looking to exploit natural capital opportunities on their land but who have been put off so far by the uncertainties of the Government’s position on the tax implications. But it only goes so far – the extension of APR will only relieve the agricultural/environmental value of the land (as it were subject to a restriction to its existing use) and so if there is any enhanced value resulting from the leasing of the land to a third party or the landowner’s own scheme, this will not be sheltered by the extension of the APR legislation. Any such uplift may be protected by BPR if the qualifying criteria are met. In those circumstances the availability of BPR will come down to the overall Balfour balance between trading and investment activity across the landowner’s whole business enterprise and whether or not BNG or other payments qualify as trading or investment income (or as a capital receipt – another uncertainty yet to be resolved) and will depend on the nature and structure of the environmental land use agreements.
Whilst the announcement yesterday is extremely welcome, it seemingly fails to cover situations where a landowner might seek to create a habitat for the sale of credits into the marketplace without offering a conservation covenant or planning agreement. This may act as another barrier to landowners looking to capitalise on the huge influx of ESG funds coming into the capital markets at the moment. That said, it is reassuring to see that the Government has also announced that it will be establishing a joint HM Treasury and HMRC working group tasked with clarifying the tax treatment of the production and sale of ecosystem service credits and associated units, with additional input from DEFRA.
If you have any clients who may be interested to hear more about the implications of the proposed change or would like to discuss natural capital opportunities generally, then please contact Sophia Key.
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Emily O’Donnell
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Sophia Key
Sectors
The content of this article is for general information only. It is not, and should not be taken as, legal advice. If you require any further information in relation to this article please contact the author in the first instance. Law covered as at March 2024.