As farmers, landowners and other rural businesses address the challenges and opportunities arising from the withdrawal of the EU’s Basic Payment Scheme, one key new player with the potential to provide an important new income stream has been the emerging natural capital markets.
The Government and the tax authorities have so far been slow to integrate these emerging markets into the broader tax framework, leaving areas of uncertainty, which many believe is hampering uptake of the schemes. As the Government prepares to unveil the Autumn 2024 Budget, all eyes are on potential changes that could impact these growing markets and give the much-needed clarification on the tax treatments, as well as a strengthening of the regulatory framework.
The natural capital market is a mechanism for stimulating private investment in natural assets through the sale of units of ecosystem services, such as clean air, water, biodiversity, and carbon sequestration.
Carbon markets and BNG
Carbon markets are a significant part of the natural capital market, with the woodland and peatland carbon codes having been among the first to be developed. Under these schemes, landowners can generate income from planting and managing woodlands or by the restoration of degraded peatlands. These activities generate carbon credits which can then be sold to businesses, organisations or individuals looking to offset their carbon emissions.
The Biodiversity Net Gain (BNG) market received a significant boost in February this year when it became mandatory for developers to deliver a BNG of at least 10% from every project. If this cannot be delivered on site, or on other sites that the developer owns, off-site biodiversity units can be bought on the market, or as a last resort from the Government. Selling these off-site biodiversity units on the BNG market is therefore a potential source of revenue for landowners.
Agricultural Property Relief
One area of uncertainty has been the Inheritance Tax treatment of land that is used in the natural capital markets, as the potential loss of Agricultural Property Relief (APR) on land taken out of agricultural use could be costly.
The announcement in the Spring Budget of the extension of APR from 6 April 2025 to include land managed under an approved environmental land management scheme agreement was a welcome one. However, while it was specified that this would cover land managed under agreements such as the Sustainable Farming Incentive and Countryside Stewardship, it was not stated whether it would also cover such schemes as the woodland carbon code, peatland carbon code or BNG. As this planned extension to APR is not yet in legislation, we still await this further clarification, and even confirmation, that the planned extension will in fact go ahead. Following the change of government, there is a good deal of uncertainty around the future of Inheritance Tax in general.
Even if the extension does go ahead and applies to land managed for BNG units and carbon credits, the Spring Budget extension as announced was only applicable to land that was agricultural land for at least two years immediately prior to the land use change. This raises the possibility of there being in future two identical blocks of land, managed in exactly the same way, but with one qualifying for APR and the other not just as a result of historic land uses, which seems an inequitable outcome.
Business Property Relief
If APR is not available on the land, Business Property Relief (BPR) might be. HMRC’s current guidance in respect of land managed under the woodland and peatland carbon codes is that the activities in creating, managing and maintaining the land for the purposes of generating these credits will generally be considered BPR qualifying. This guidance is, however, not yet extended to include BNG, with HMRC just commenting that further guidance will be issued when more details are available. This uncertainty needs addressing as a matter of urgency, and we can only hope that the Autumn Budget will do so.
There is a similar level of uncertainty around the Income Tax, Capital Gains Tax and even the VAT treatment of the payments generated by these schemes.
So the hopes are that the Autumn 2024 Budget will give this much needed clarity and play a significant role in shaping the future of the natural capital market in the UK. By providing clear tax guidance, the Government could help unlock the full potential of natural capital as a driver of sustainable economic growth, as well as giving those already involved in the schemes, and those considering taking them up, the proper guidance they so urgently need.
