Following the Spring Budget 2023, the UK government has launched a consultation on the taxation of ecosystem service markets (carbon and biodiversity net gain) and the application of Agricultural Property Relief (APR) for Inheritance Tax (IHT) on changing land use. It also looks at a potential restriction for APR for land on shorter tenancies. Our farming experts summarise the situation and explain how you can have your say.

During the Spring Budget, it was announced that the government would be reviewing selected tax issues related to ecosystem service markets and environmental land management. As a result, an open consultation has been published, which will run from Wednesday 15th March until Friday 9th June 2023.

Taxation of ecosystem service markets

The government has launched a review into certain elements of taxation on ecosystem service markets and environmental land management schemes in the UK. The aim of the review is to ‘understand the commercial operations and the areas of uncertainty in respect of taxation’.

This particularly affects landowners who may be changing their land use from agricultural production to environmental sustainability. There is currently uncertainty over how such land might be treated from an inheritance tax perspective and this can be off-putting for owners exploring environmental options.

It is hoped that following the consultation the government will consider expanding the scope of APR to include land managed for environmental purposes.

Restriction on Agricultural Property Relief (APR)

At present, in order to be eligible for APR you must have owned and occupied a property for agricultural purposes for a minimum of two years. If your land is tenanted but still farmed, this time frame extends to seven years.

In relation to tenant farming, the government has confirmed that it will evaluate the recent recommendation from Rock Review that 100% APR should be reserved for tenancies of eight years or more. If the change is implemented, the government will be hoping to incentivise landlords to grant longer term tenancy agreements, as well as encourage tenants to enter such agreements.

There are many reasons why shorter agreements may be more appropriate for both landlord and tenant, and the consultation is looking for feedback on the impact of introducing such a restriction on the market.

How can I have my say?

If you would like to submit your personal views to the consultation, you can email [email protected].

Catherine Desmond, our Private Client Partner and farms & landed estates specialist at PKF Smith Cooper, will be monitoring the progress of the consultation and may submit a response if there is a view from clients and contacts that this would be helpful. In response to the announcement, she said: “It is positive that the government are engaging with an issue that has been troubling clients for some time now and it is to be hoped that IHT reliefs will be expanded to encourage participation in environmental schemes rather than be a hindrance to them.”

You can view the consultation in full on the government website.

If you would like further advice and support on navigating the complex tax issues that surround the farms and landed estates sector, please get in touch with us today to discuss your needs with a member of our farms and estates team.