HMRC has now published long-awaited guidance on the tax treatment of payments for “ecosystem services,” including Biodiversity Net Gain (BNG). This provides greater clarity for farmers and landowners considering BNG agreements—but also highlights key risks and planning points.
What has changed?
HMRC’s new guidance confirms how it will approach the taxation of payments received for:
-
Biodiversity Net Gain (BNG);
-
Nutrient neutrality;
-
Woodland Carbon Code; and
-
Peatland Code.
Similar approaches are likely to be taken for other emerging land-based environmental markets.
How will landowners be taxed on the BNG payments they receive?
Payments will be taxable and, in most cases, will be treated as trading income either as part of an existing farming or land-based trade, or as a deemed trade through commercial occupation of land. This reflects the view that you are creating and selling a new asset (the biodiversity unit) rather than disposing of the underlying land. Specific rules apply for woodlands.
Payments will be treated as capital only in very limited circumstances, for example where they compensate for the permanent loss or sterilisation of land.
Wider tax issues still apply
BNG arrangements can trigger multiple tax considerations:
-
Income tax / corporation tax – primary exposure
-
Capital Gains Tax (CGT) – on future land disposal
-
VAT – Sales of BNG units by taxable persons are subject to VAT at the standard rate.
-
Inheritance tax (Agricultural Property Relief) – From 6 April 2025, land under qualifying environmental management agreements can continue to benefit from APR, subject to conditions, though it must be remembered that not all land in environmental management schemes can qualify for relief.
-
Stamp Duty Land Tax – payments for ecosystem services alone are not generally subject to SDLT, but SDLT may apply where land or interests in land are acquired.
HMRC’s guidance provides principles, but not definitive answers in all cases.
What does this mean for farmers and estates?
Opportunities
-
BNG can provide a long-term, diversified income stream
-
Potential to generate value from lower-performing land
Risks
-
Exposure to higher income tax rates than expected
-
Upfront tax liabilities on long-term agreements
-
Impact on agricultural reliefs and succession planning
-
Long-term land-use restrictions (typically 30+ years)
Key actions before entering a BNG agreement
-
Take advice early – tax treatment depends heavily on structure
-
Stress-test the payment profile – timing of income vs costs
-
Review the impact on taxes
-
Align legal, tax, and land management strategy
-
Model long-term cashflow and tax exposure
How we can help
Our Agriculture and Rural Affairs specialists are able to assist with:
-
Structuring BNG arrangements for tax efficiency and flexibility
-
Advising on long-term land use and succession planning
-
Supporting negotiations with developers and habitat bank providers
Get in touch
If you are considering BNG, or have been approached about your land, we would be happy to discuss how the new HMRC guidance may affect you. Please get in touch.