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Taxation of environmental land management and ecosystem service markets – consultation and call for evidence


As part of the Budget Day publications, HMRC issued a consultation paper on the taxation of environmental land management and ecosystem service markets.

This consultation document addresses the uncertainties in the taxation of new Environmental Land Management Schemes (ELMS) as we move away from the EU’s Common Agricultural Policy. By consulting with interested parties within the agricultural industry, HMRC hope to design future legislation that clearly establishes the tax treatment of the production and sale of ecosystem service units, and the impact of ELMS on the availability tax reliefs for Inheritance Tax, particularly in respect of agricultural property relief (APR).

The ecosystem service markets are designed to support higher private investment in the natural environment through such schemes as the mandatory biodiversity net gain requirements for development sites. However, as the demand for these schemes has increased so has concerns about the potentially adverse tax consequences for landowners in committing land to them, and this uncertainly is one of the largest obstacles to their take up. Committing land to woodland carbon, peatland carbon or biodiversity projects are often long-term decisions, from 30 to 125 years depending on the type of scheme, and not something that landowners want to commit to with any sense that there could be detrimental tax implications both for themselves and future generations.

Whilst there is some uncertainly around how income received for the credits generated by the schemes is treated, mainly revolving around whether it is income, being a return on the active management of the land, or a payment for a right over land, the largest anxiety is Inheritance Tax, and the possible loss of APR.

The most obvious concern is that APR is only available in respect of land occupied for the purposes of agriculture and habitat creation is not an agricultural use. However, there are currently a number of specified land habitat schemes, such as former set-aside land and establishment of salt-marshes, which allow APR even though the land covered by them is taken out of agricultural production for long periods of time, and one solution may be to broaden this list to include former agricultural land that is turned over ELMS projects.

HMRC recognise that the loss of APR is likely to be a significant barrier to the involvement of agricultural landowners and farmers in land use change under the ELMS, and do state within the document that “the objective is to ensure that land taken out of agricultural production permanently or for an extended period for this reason does not lose relief.”

This is a subject that we will be watching with interest and updates will be reported in future articles.

This article is from the latest edition of our Agricultural Briefing. To receive future copies of any of our newsletters directly to your inbox, please visit our preference centre  to register your interest.

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