HM Treasury has opened a new consultation on the Taxation of environmental land management and ecosystem service markets and the potential expansion of Agricultural Property Relief (APR).
The consultation, published with the Budget 2023 documents, asks for your views on:
- How the production and sale of ecosystem service units such as woodland and peatland carbon units including those not yet issued, and biodiversity and nutrient mitigation units, should be taxed bearing in mind that these markets can involve VAT, Corporation Tax, Income Tax, Capital Gains Tax, Inheritance Tax, and stamp duty land tax.
- There are concerns that the existing laws create uncertainty, particularly in respect of woodlands and income and Corporation Tax.
- Whether APR should be expanded to allow longer-term changes of use from agricultural to environmental without relief being lost.
The consultation comes as the government undertakes a significant reform of agricultural policy and spending in England as part of a move from the EU’s Common Agricultural Policy to three Environmental Land Management Schemes:
- The Sustainable Farming Incentive.
- Countryside stewardship.
- Landscape Recovery.
Within this, the government is phasing out subsidies for land ownership and tenure, and will instead pay farmers and land managers to provide environmental goods and services alongside food production.
Taxation of ecosystem service markets
Q1: What has been, or would be, the effect of ecosystem service payments on existing business models, such as farming or commercial timber production?
Q2: What are the main areas of uncertainty in the taxation of trading income for income tax and corporation tax in relation to the production and sale of units generated by ecosystem service markets? Please provide evidence and scenarios, including the relative scale of the concern by explaining where decisions have and have not been influenced by the uncertainty of the tax treatment.
Q3: Should the tax system account for the timing difference between the upfront and ongoing project costs, with the delay in receiving income-generating units for example, should the tax system provide tax certainty in respect of timing mismatches, which may require an override to the accounting treatment?
Q4: How could greater clarity be provided in these areas (e.g. guidance, law changes)?
Q5: Are there any other areas of uncertainty in respect of the broader taxation of the production and sale of units generated by ecosystem service markets? Please provide evidence and scenarios, including the relative scale of the concern by explaining where decisions have and have not been influenced by the uncertainty of the tax treatment.
Q6: How could greater clarity be provided in these areas (e.g. guidance, law changes)?
APR and environmental land management
Q1: What are the areas of concern in respect of agricultural property relief and environmental land management? Please provide evidence and scenarios, including the relative scale of the concern by explaining where decisions about land use change have and have not been influenced by the scope of agricultural property relief.
Q2: Do you agree that the qualifying conditions for relief would need to be underpinned by live undertakings and ongoing adherence to those undertakings at the point of transfer?
Q3: Do you agree with the potential proposed approach to the list of Environmental Land Management Schemes that could qualify for relief where the activities covered relate to land being taken out of agricultural use?
Q4: Could the government remove the list of existing enactments for land habitat schemes in the existing legislation? Are you aware of any land continuing to qualify for relief now under any of the existing enactments?
Q5: What agreements that meet high verifiable standards and have robust monitoring could be added to any list of qualifying Environmental Land Management Schemes? Please explain, including any potential unintended consequences or tax planning opportunities that might need to be considered and how they could be addressed.
Q6: How could the government achieve its intention not to expand the scope of relief beyond agricultural land that was being used for agricultural purposes? What would the practical challenges be for those claiming relief and how could they best be overcome?
Q7: How could the environmental land be valued most appropriately? What would the practical challenges be and how could they best be overcome?
Q8: Are there any other design issues that would need to be considered if the government decides to update the land habitat provisions in agricultural property relief?
Q 9: What would the impact be of restricting 100% agricultural property relief to tenancies of at least eight or more years?
Q10: What exclusions would be necessary and how could these be defined in legislation if the government pursued this approach?
Useful guides on this topic
IHT Agricultural Property Relief
What is Agricultural Property Relief (APR)? When does it apply? What are the conditions and restrictions of the relief?
Woodlands and forestry ownership carry significant tax reliefs, including Income Tax, Capital Gains Tax (CGT) and Inheritance Tax (IHT). This is a guide to those reliefs.