A new biodiversity credit scheme was recently launched in England to ensure that every new road and housing project has a positive impact on the natural environment. While this initiative presents an opportunity for farmers and landowners to create and sell biodiversity units, it is important that they understand the tax implications first.

What is Biodiversity Net Gain?

Biodiversity Net Gain (BNG) is a government initiative surrounding development and land management, which aims to achieve a net gain in biodiversity. It stipulates that all new construction developments in England must achieve a 10% net increase in biodiversity or habitat. 

Unlike past environmental initiatives that have aimed simply to mitigate damage to the environment, the BNG scheme requires developers to leave the environment in a measurably better condition than it was before the project started. For example, if a woodland is cleared to make way for a road, another woodland must be created on-site or elsewhere to compensate for the loss with at least 10% more biodiversity than the original woodland.  

How Biodiversity Net Gain works

There are three ways the developer of a new site can achieve the 10% Biodiversity Net Gain required by the scheme: 

  • Create on-site biodiversity – this must fall within the red line boundary of a development site. 
  • Create a mixture of on-site and off-site biodiversity – ‘off-site’ BNG covers biodiversity made on the developer’s own land outside the red line boundary and biodiversity units bought on the market (see below for more information). 
  • Buy statutory biodiversity credits from the government – if a developer cannot achieve 10% BNG on-site or off-site using their own land, they will need to buy statutory biodiversity credits. 

How can farmers and landowners benefit from BNG?

If you are a farmer or landowner, you can register your land to become eligible to generate BNG credits by improving habitats. The land you have registered can then be sold to developers or other parties that need to purchase off-site locations to offset biodiversity losses on their construction projects or alternatively used to offset against their own internal projects. 

What are the tax implications associated with BNG?

The tax implications associated with participating in the BNG initiative are complex, as there is still uncertainty surrounding how land that is purchased, sold and managed for BNG purposes will be taxed.  

There are income tax, VAT and capital tax implications, which should all be considered before any agreements are entered into. For instance, will the sale of the units be subject to capital gains tax or income tax and will the full amount be taxed upfront or over the period of the agreement?  

The intent behind the transaction and the way the land is managed are likely to influence the tax treatment and can make a large difference to the tax payable, as capital gains tax is currently 20% whereas income tax could be as high as 45%.  

Most arrangements are not a lease, they are an agreement to manage land over a period of time. They could therefore be subject to income tax, with the upfront payment being spread over the period of the agreement. From an Inheritance Tax perspective, there is a risk that valuable reliefs such as Agricultural Property Relief (APR) or Business Property Relief (BPR) could be lost if the conditions are no longer met as a result of the agreement entered into.  

The most recent government budget included provisions for the scope of APR to be extended to cover land under BNG schemes, however no further details have yet been released. It is also important to consider what the landowner is permitted to do under the arrangement – they may still be able to take off a grass crop or may be permitted to grow orchards, which are still trading food production activities. 

In addition to tax implications, it is vital that landowners understand the legal obligations surrounding BNG. Most importantly, all farmers and landowners who register for the scheme must maintain and manage the land in a way that supports biodiversity for a minimum of 30 years. There are also no details yet known about what will happen when any agreements come to an end and whether the land could be returned to full agricultural production.  

Catherine Desmond, Private Client Partner and Head of Landed Estates and Rural Business, commented: “The BNG scheme is very ambitious with many legal and tax implications to consider, which is why we strongly advise any farmers or landowners wanting to get involved to seek our specialist advice first to ensure their compliance. Effective regulation of the scheme by the government and local authorities will be crucial to its future success.” 

Whilst BNG offers potential benefits for farmers and landowners, there are risks involved with the scheme that should be carefully evaluated and managed by tax specialists. Our private client team can help you to successfully navigate this complex initiative without compromising tax efficiency. Contact us today to find out more.