A consultation on environmental land management was announced at the Spring Budget 2023. This talks through the issues concerning applying the existing tax rules to the emerging ecosystem service markets.

The consultation is made up of two key parts:

1. a call for evidence on the tax treatment of the production and sale of ecosystem service units; and
2. a consultation about the scope of agricultural property relief (APR) for inheritance tax.

Nature markets enable farmers and land managers to attract private investment for the provision of ecosystem services. These markets involve the use of land to generate units related to carbon and other forms of pollution. The key markets under consideration are:

• Woodland carbon units: These are generated by the sequestration of carbon from the atmosphere and are governed by the UK Woodland Carbon Code. They involve planting and management of woodlands to ‘offset’ carbon emissions. Verification ensures that the credits being sold represent real, quantifiable, additional and permanent removal of carbon.
• Peatland carbon units: These are generated through the restoration of peatland to avoid greenhouse gases being released into the atmosphere. Like woodland, they are subject to a verification process, governed by the UK Peatland Code.
• Pending issuance units: A future promise that woodland carbon units or peatland carbon units will be delivered to the purchaser. Woodland and peatland restoration can take decades to deliver an income to landowners. Therefore, both the woodland and peatland codes allow landowners to generate an income stream earlier in the commercial project, through the sale of pending issuance units. However, the units are not guaranteed to the same standard.
• Biodiversity units: Generated from creating or enhancing habitats in a particular location, these units can be sold to property developers, who are required to deliver at least 10% biodiversity net gain.
• Nutrient mitigation: These are generated in a similar way to biodiversity net gain by undertaking land use change, such as the creation of new wetlands or woodlands, to mitigate the impacts of development.

Part one of the consultation seeks views on the tax treatment of these markets. The government seeks to better understand commercial operations and areas of uncertainty in respect of taxation. This includes whether uncertainty of tax treatment is influencing decisions. It also asks whether greater clarity should be delivered through guidance or legislative changes.

The second part of the consultation considers APR.

First, it explores the extent to which the existing scope of APR is a barrier to expanding ecosystem service markets. It also considers the potential to extend its scope to allow for non-agricultural land stewardship schemes. However, the consultation document is clear that the government does not intend to bring into scope land that otherwise would not have qualified for APR. In line with the restriction in the geographic scope of APR from April 2024 announced at the Spring Budget, any changes will only apply to land in the UK (not the EEA, Channel Islands, or Isle of Man).

Second, it considers the impact of the recommendation made in the recent Rock Review of tenant farming in England, to restrict the application of 100% APR to longer tenancies of eight or more years.

ICAEW’s Tax Faculty welcomes this consultation, as it will hopefully work towards greater certainty around the tax implications of diversification into natural capital. Members are encouraged to provide feedback on the issues raised in the consultation document to Angela Clegg by 15 May 2023.

ICAEW and Tax Faculty members can read more about these issues in TAXline:

• Taxation of woodlands | ICAEW
• Farm business tenancies after Brexit | ICAEW