Environmental land use - A tax update

Given the reduction in direct payments and the introduction of Biodiversity Net Gain in 2024 under the Environment Act 2021, we have seen an increase in environmental land management schemes.

Whilst we now have some certainty on the inheritance tax (IHT) treatment of environmental land use, there is still no guidance for income tax, corporation tax or capital gains tax (CGT) purposes.

After much lobbying, one positive measure announced in the 2024 Autumn Budget was that agricultural property relief (APR) would be extended from 6 April 2025 to land managed under certain environmental agreements.

Finance Act 2025 has replaced section 124C in the Inheritance Tax Act 1984 to confirm that the land must have been previously occupied for the purposes of agriculture throughout the period of two years ending with the day it became subject to an environmental management agreement (EMA) and since then the land must have been managed under the terms of that EMA. Therefore, the relief cannot apply to EMAs on land which was not previously occupied for the purposes of agriculture.

The relief could also apply to buildings occupied with that land and used in connection with the EMA on the land.

The legislation confirms that the EMA must be legally enforceable and with a public authority. A public authority must be an authority which exercises public functions or acts under arrangements with a public authority. Effectively a public authority refers to the UK Government, Devolved Governments (Scottish Parliament, Senedd Cymru and Northern Ireland Assembly), public bodies, local authorities and approved responsible bodies. The latter is one designated under the Environment Act 2021 s.119 and published on a list of designated bodies by DEFRA.

The purpose of the agreement must be for the protecting, restoring or enhancing the natural environment, or natural resources of land or water. In practice, it requires land to be used and managed in a way that would prevent it from being occupied for the purposes of agriculture.

From April 2026 the extended APR will be subject to the restriction to 100% relief on value over £1M with 50% relief thereafter.

There remains no clarity from HMRC on whether they would deem activities carried out under an EMA sufficient for BPR purposes – i.e. the activities amount to services or trading activities rather than investment. Therefore, it remains crucial to consider the activities involved and whether such agreements might be deemed investment. If so, whilst the land occupied under the EMA might qualify for APR, it may not qualify for BPR, and if the activities fall within an otherwise trading business, that business may no longer qualify for BPR if the investment activities account for more than 50%. Therefore, careful consideration of the business structure is required to ensure BPR is protected.

There is also no clarity on the taxation of payments received under an EMA or for the sale of BNG units or carbon credits. Therefore, this remains dependant on the nature and terms of the agreement and services carried out over the term of the agreement, or creation and sale of units and credits.

The payments received could be deemed trading or property income, subject to income tax or corporation tax. As a result, where the agreements are with individuals, and payments are large, this can result in income tax liabilities with tax rates charged at up to 60%, compared to an agreement with a company chargeable to lower corporation tax rates of 25%. Where an upfront lump sum is received at the beginning of the EMA, to cover services provided over the term of the EMA, it may be possible to defer part of the charge to income tax into future years, over the term of the agreement.

In some cases, it might be arguable to charge CGT (currently at 24% for individuals). This might be the case if the Conservation Covenant, or s.106 agreement results in a loss in value of the land, or where the units/credits are held as an investment for a period before sale.

Whether the income is deemed trading or property income as opposed to capital will depend on the individual circumstances. For example, considering the creation and sale of BNG units and carbon credits, if there are multiple transactions sold with minimal interval between creation and sale, sold on commercial agreements, these could be indicators of trading income. Whereas the creation of units which are held indefinitely with a view to increases in value, may be less likely to be trading, and a future sale may be more arguably chargeable to CGT.

Whilst there are likely to continue to be huge opportunities for landowners, it is important to take advice on the tax position and to consider the future structure for the ownership of the land and operation of the activities to ensure IHT and income tax liabilities are minimised. The use of a limited company may limit the risk to exposure to tax as well as the future risk of the agreements failing.

Tax should not be the deterrent to considering the opportunities, as where they commercially make sense, appropriate planning can be put in place to ensure maximum benefit is received from these opportunities. The wording of the contracts and the activities required to secure the income, will be crucial to protecting reliefs. Take advice early.