Consultation on tax for environmental land use

UK government launches consultation into how environmental land management schemes and the delivery of ecological services should be taxed.

Including considering if such uses might fall within the scope of Agricultural Property Relief for inheritance tax purposes.

James Spreckley (pictured) and John Rouse, rural sector specialists at Lodders, welcome the consultation and encourage landowners and farmers to have their say.

What does the consultation cover?

The consultation seeks views on the tax treatment of environmental land management and ecosystem service markets, and has two main parts:

Part 1 looks at the general tax treatment of the production and sale of ‘ecosystem service units’ to understand the commercial operations and the areas of uncertainty in respect of taxation. Examples of these are the UK Woodland Carbon Code, the UK Peatland Code, and the forthcoming Biodiversity Net Gain scheme for England.

Part 2 of the consultation considers the existing scope of Agricultural Property Relief (APR) from inheritance tax. It considers if the risk of this relief being lost where there is a long-term land use change from productive farming to the delivery of environmental outputs, is a potential barrier to some landowners and farmers engaging with the new schemes and markets. At present, if land is taken permanently out of agricultural use it ceases to qualify for APR and becomes liable to inheritance tax.

The government is also using this opportunity to explore in more detail a recommendation in the Rock Review to restrict the application of 100 per cent APR to rented land where this is let under a farm business tenancy of at least eight years. The Rock Review suggests this would encourage landlords to grant longer term tenancy agreements and encourage tenants to enter long term environmental agreements.

James commented:

“Whilst we have several farming and landowner clients that have been at the vanguard of environmental land management (ELMS) and biodiversity net gain (BNG) schemes, we are acutely aware that the lack of clarity over future tax treatment has led to many landowners taking a more ‘wait and see’ approach.

“We are pleased to see the launch of this consultation process, as it is crucial that the government clarifies the tax position to ensure that these vital environmental schemes can be implemented with confidence.”

John added:

“The proposal to expand Agricultural Property Relief (APR) to include non-agricultural land stewardship schemes, such as BNG and EMLS, will be of major interest to landowners and farming families considering diversifying into natural capital projects, whilst still leaving a legacy for future generations.”

The CLA’s president Mark Tufnell has also commented on the news, saying:

“The CLA has campaigned extensively to change the definition of agriculture in the tax system to include ecosystem services. It is vital to give farmers and landowners the confidence they need to engage with environmental delivery, improving biodiversity and carbon sequestration. Without this change, we will see a perverse outcome whereby forward thinking, nature friendly farming will be punished by the tax system. This change would also serve to encourage farmers to look afresh at entering into Environmental Land Management schemes.”

How to take part in the consultation process

The consultation and call for evidence was included in the Spring Budget papers and is open until 9 June 2023. Comments can be sent to personaltaxconsultations@hmtreasury.gov.uk or by post to: Personal Tax Team, HM Treasury, 1 Horse Guards Road, London, SW1A 2HQ.

As active legal advisers to several landed estates, agricultural landowners, and farming families with interests in environmental and natural capital projects, we will most certainly be taking part in the consultation, and we encourage all interested parties to do the same.

You can read the consultation document in full here.

Find out more about Lodders’ agricultural law services here.