HM Treasury has published a response to the 2023 consultation ‘Taxation of environmental land management and ecosystem service markets’. Agricultural Property Relief (APR) will be extended to cover environmental land management from 6 April 2025.
The consultation is part of the government's reform of agricultural policy and spending in England.
Environmental Land Management Schemes will pay farmers and land managers to deliver, alongside food production, certain environmental benefits that can only be delivered by them in the wider countryside. This is instead of offering payments based on the amount of land farmed.
Ninety-eight responses to the consultation were received.
- Respondents recognised that Ecosystem Service Payments (ESPs) encourage more sustainable practices and businesses may refocus to diversify their income streams and supplement falling returns on agriculture, depending on the economic value of doing so.
- It was noted that landowners were wary of the uncertainty of the tax treatment of ESPs, meaning this may be a barrier to change.
- An area of confusion was around when receipts are considered capital or a split of both capital and revenue.
- The absence of accounting standards was noted as a key issue. It was preferred for tax treatment to follow accountancy standards.
- Concern surrounded how to classify and measure up-front costs and initial returns from ecosystem services schemes, as well as how to account for maintenance costs and losses.
- All but one respondent supported an extension of Agricultural Property Relief (APR) to environmental land management, as concern was raised about the availability of APR where land is taken out of agricultural production.
- There were mixed views on whether live undertakings or agreements under an environmental scheme should be a qualifying condition for any extension to APR.
- There was concern that there could be unfair consequences if relief ceased to apply where the undertaking or agreement ended because of a breach. This might be where a tenant breached an undertaking, resulting in the landlord losing APR.
- There was also concern about what would happen when undertakings or agreements came to an end.
- The original consultation detailed that any extension to APR would be designed to remove barriers to changing land use. This meant that the scope of APR would not be increased beyond agricultural land that was previously being used for agricultural purposes.
- The concern highlighted by respondents in this area was the need to provide evidence that agricultural land had been used for agricultural purposes many years after land use change, including after potential changes of ownership.
- When valuing environmental land, there was support for using its market value subject to the special assumption of a restriction to its existing use.
- Most responses opposed restricting APR to tenancies of at least eight years.
Next steps
The government will establish a working group with industry representatives to identify solutions that clarify the tax treatment of the production and sale of ecosystem service credits and associated units.
The scope of APR will be extended to environmental land management from 6 April 2025, applying to lifetime and death transfers on or after that date.
The consultation response gives details as to how this APR extension will work:
- APR will be available for land managed under an environmental agreement with, or on behalf of, the UK government, Devolved Administrations, public bodies, local authorities, or approved responsible bodies. There will not be a specified list.
- APR will continue to be available where an agreement has concluded if the land continues to be managed in a way that is consistent with that agreement.
- Relief will only apply where the land was agricultural land for at least two years immediately before the land use change.
- There will not be a need to show the land was used for agricultural purposes and would have qualified for agricultural property relief before the land use change.
- The existing holding period for agricultural property relief will not be restarted by land use change.
- The qualifying land will be valued at its market value, subject to the special assumption of a restriction to its existing use.
- Hope and development value will remain elements of open market value but, consistent with the current valuation rules, will not be included in the value qualifying for APR
- Buildings used in connection with environmental land, including farmhouses, will qualify for relief where that building is occupied with, and that occupation is ancillary to, environmental land. This is consistent with the current rules.
The government will not restrict APR to tenancies of at least 8 years.
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?
Farming: Tax Overview
What is farming? What are the tax consequences and tax considerations of farming? What are the features of agricultural tenancies? What expenses can farmers claim for tax purposes? Are there special tax and accounting rules for farmers? What are the VAT rules for farmers?
External link
Consultation outcome: Taxation of environmental land management and ecosystem service markets
