Farmers and landowners have been given long-awaited clarity over how Biodiversity Net Gain payments will be taxed.
HMRC has published guidance confirming its approach to payments from BNG, nutrient neutrality schemes, the Woodland Carbon Code and the Peatland Code.
The move is expected to give greater certainty to farmers, estates and rural businesses considering environmental land use agreements.
Under the guidance, most BNG payments will be treated as trading income for tax purposes.
That means HMRC generally views landowners as creating and selling biodiversity units rather than selling or disposing of the underlying land.
Capital treatment will only apply in more limited cases, such as where payments compensate for the permanent loss or sterilisation of land.
Philip Whitcomb, a Private Client Lawyer specialising in agricultural matters at Clarke Willmott, said: “This guidance is significant because it gives landowners greater visibility over how HMRC is likely to tax BNG income, but it also reinforces the importance of careful structuring.
“Many landowners may assume these arrangements attract capital treatment, when in reality HMRC will generally regard them as trading income.”
The guidance also raises wider tax issues including income tax, corporation tax, capital gains tax, VAT, inheritance tax and Stamp Duty Land Tax.
Whitcomb warned BNG schemes can create valuable long-term income streams but should not be treated as simple environmental agreements.
Advisers are urging landowners to review tax treatment carefully before entering BNG deals, particularly where agreements could affect agricultural reliefs, future sales or long-term land use restrictions.
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