After a long period of uncertainty, HMRC has published clear guidance on how payments from ecosystem service markets will be taxed. If you’re involved in, or thinking about, Biodiversity Net Gain (BNG), nutrient credits, woodland carbon or peatland carbon, here’s what you need to know.
What’s Covered?
The guidance covers four schemes: BNG, nutrient neutrality, the Woodland Carbon Code and the Peatland Code. It also sets out principles HMRC will apply to other emerging environmental markets.
You can read the full HMRC technical note here.
Key Tax Points for Landowners
- Your income will almost always be taxable as trading income, either as part of your existing farming trade, or as a deemed trade through “commercial occupation of land.”
- Woodlands are the main exception. Income from commercially managed woodlands, including ecosystem service payments and BNG units generated on that land, is exempt from income tax. This is a valuable relief, but the conditions must be met. There is no equivalent exemption for peatland.
- Payments are income, not capital, even for agreements lasting 75 years or more. Capital treatment only applies in very limited cases, such as permanent “sterilisation” of land.
- Your costs (land works, surveys, legal fees, registration) will generally be deductible against trading income, property income, or as capital expenditure for CGT purposes, depending on how the land is used.
Other Considerations and Taxes
Stacking: Using the same land for more than one scheme is possible in some cases, but the tax treatment of each income stream must be considered separately.
VAT: BNG unit sales are subject to VAT at the standard rate. Woodland and peatland carbon credits follow separate VAT rules for carbon credits.
Stamp Duty Land Tax (SDLT): Ecosystem service payments alone don’t attract SDLT, but it may apply if land changes hands.
Inheritance Tax: From 6 April 2025, land in qualifying environmental agreements should still benefit from agricultural relief as part of the wider farm system, but this is not automatic. It is worth checking inheritance tax rules carefully before progressing with any project.
Gaps Remain
The guidance doesn’t resolve everything. How income should be recognised under UK GAAP, particularly for BNG unit sales, is still being worked through, with industry guidance expected later this year. Some VAT questions also remain open.
What Should You Do?
Take professional advice before signing any agreements. The tax and accounting treatment can significantly affect the economics of a deal, and it’s much easier to get this right at the outset.
Our sponsors Old Mill and Land Family Business both advise farmers and landowners on natural capital schemes and would be happy to help.
This article is for general information only and does not constitute tax or financial advice.
