Biodiversity net gain (BNG) is a way to contribute to the recovery of nature while developing land. It is making sure the habitat for wildlife is in a better state than it was before development. This will apply from November 2023 for developments in the Town and Country Planning Act 1990, unless exempt. It will apply to small sites from April 2024.

BNG will apply to you if you are a land manager, a developer or the local planning authority. If land is developed then the biodiversity units of the site post development must be at least 10% greater than the biodiversity units of the site pre development.  The developer must try to avoid loss of habitat to a piece of land they plan to do development work on. If they can’t do this, they must create habitat either on-site or off-site, to meet the 10% gain requirement.  If it is off-site, this may well mean buying biodiversity units from a land manager.

As a land manager, you can be paid by selling biodiversity units (if you are in England), consent to register land if you are not the landowner and have a legal agreement for the land you’re registering.

The local planning authority will have to approve a biodiversity net gain plan for development work before it can start.

But what does this mean from a tax perspective if you are a landowner? This is a good question and the answers are not currently as clear-cut as we would like.

The Government has recently closed a consultation and were ‘seeking views on the taxation of ecosystem service markets and potential expansion of Agricultural Property Relief (APR) from inheritance tax (IHT)’. The Treasury were looking for examples of evidence on the tax treatment of the production and sale of ecosystem service units, with the aim to understand the commercial operations and the areas of uncertainty in respect of taxation. They were also looking at the scope of APR from IHT. This was with the aim of exploring the extent to which the current scope of APR may represent a barrier and, if necessary, potential updates to the scope of the existing land habitat provisions in the relief.

Our thoughts and concerns are centred on IHT and whether APR would still apply on the agricultural value of the land and how the sale of the biodiversity units would be taxed on the landowner. Our main concern is that BNG is not currently detailed in the IHT legislation and DEFRA have said: ‘work is underway to provide clear guidance as to whether these schemes can be covered by APR even if the land isn’t actively farmed’. I hope that we will have answers soon as November 2023 and April 2024 are fast approaching!

There is also Business Property Relief (BPR) to consider from an IHT perspective, both directly but also in connection with the ‘Balfour matrix’, namely reviewing the turnover, profit, management time and asset values of the trading activities versus the investment activities. Every landowner has a different set up, does different things on their land and in their businesses so every case will need to be considered on a case by case basis.

APR and BPR are very important to landowners so they can pass their land and businesses down to the next generation and keep the farm or estate going for the future, without a large IHT bill on death. The key point with APR is that the land needs to be actively farmed for the purposes of agriculture– if they sell biodiversity units is this condition still met? This will all depend on what is contained within the legal agreements and BNG contract. The contracts that we are currently seeing vary from farm to farm and therefore it is important that these are reviewed in details before any agreement is entered into in order that the tax position can be analysed. We will look to consider that if APR were not available, would BPR be available? If the BNG agreement provides for some form of rental structure, would this rental income tip the scales between the business being a trading business or an investment business?

Whenever we are considering IHT planning, we are also thinking about succession planning with our clients. This is no exception. What can landowners do now to hopefully protect their family’s position? Again, every landowner is different so we need to review their family’s position.

Capital Gains Tax (CGT) is also something to consider, both in terms of any gifts of assets that are planned but also the ‘what ifs’ if there might be a land sale in the future? Would Rollover Relief and Business Asset Disposal Relief still be available if landowners proceed with a BNG contract? And also what about the availability of Holdover Relief if gifts are being made? The timing is critical. It may also be that monies for biodiversity units are capital receipts. Again, this depends on the terms of the legal agreements.

Alternatively, the monies could be liable to income tax if the income represents trading receipts or a rent (investment income) The agreements we have seen to date are all different but thus far the wording of these agreements largely reflects that the income is either trading or investment income and not a capital receipt. The government has also confirmed that biodiversity units will be subject to VAT when they are sold.

All the taxes and whatever landowners and farming businesses do, is always interlinked. We need to understand the current position, the future position and review the legal documents from a tax perspective. As with everything, forward planning and seeking taxation advice is essential. The BNG schemes can look very attractive from a financial perspective but there could be longer term tax implications that, when assessed, may make the scheme far less attractive.

For more information on this subject, please contact Claire Rigby, our BNG expert in our Agriculture and Property team by emailing or call us on 01295 250401. You can also contact us here with your query and we will get back to you.

Information for readers: This material is published for the information of clients. It provides only an overview of the regulations in force at the date of publication, and no action should be taken without consulting the detailed legislation or seeking professional advice. Therefore no responsibility for loss occasioned by any person acting or refraining from action as a result of the material can be accepted by the authors or the firm.