Natural Capital on Estates
Natural Capital schemes are proving to be a successful revenue stream for several estate landowners, who have been able to use them to supplement more traditional income streams.
The concept works when a landowner enters into a mitigation agreement with a developer, often exchanging vast sums for the benefit of credits or units, to offset a development project.
These schemes revolve around:
- Carbon credits (tree planting)
- Nutrient mitigation (reduction of nitrate and phosphorus activities)
- Biodiversity net gain (the creation of habitats).
These opportunities have arisen broadly out of the global agenda to mitigate climate change. The latest of these is biodiversity net gain (BNG).
The increasing significance of BNG
BNG is an approach which aims to leave the natural environment in a better state than before. The Environment Act 2021 (EA 2021) requires that proposed developments in England must provide a minimum BNG of at least 10%.
The Government has yet to provide guidance on how BNG will be regulated.
The EA 2021 provides for the concepts of a BNG offsite register, the establishment of responsible bodies to monitor habitat creation and management, and the conservation covenants.
We don’t yet know how to, and who can, become a responsible body. The EA 2021 establishes the concept of conservation covenants, but without the responsible bodies to take the benefit of these covenants, there is little that can be done.
With regulatory changes and uncertainty, comes opportunity. Many farmers and estate landowners have already started to capitalise on the ‘wild west’ in the Natural Capitals market.
Nutrient mitigation has proved to be a significant source of revenue for landowners in certain catchment areas. The landowners have effectively provided “credits” to developers whereby they cease farming operations on certain areas of their landholdings, providing a net benefit of nutrient reduction and offsetting new development projects.
However, with global food demand set to increase by 30% to 60% by 2050, is removal of land from agricultural production the right thing to do?
Also, there is potential for larger BNG specific projects on suitable alternative natural greenspace (SANG) land being at such a price that the market price for BNG units reduced to such a level that the financial gain of such Natural Capital is then insignificant.
Tax implications of Natural Capital
Landowners considering Natural Capital offers should take advice on the structuring of such schemes to ensure that they don’t have an adverse effect on long-term capital tax planning.
Estate owners and farmers often assume that Agricultural Property Relief (APR) from inheritance tax will be available on the whole value of their farm when they die, but the availability of relief is subject to meeting various statutory criteria.
Relief applies to agricultural land and pasture (together with ancillary woodland) used for the purposes of agriculture, and certain specified habitat schemes, for the relevant period.
Care should be taken that land planted with trees for carbon credits, for example, can still qualify as ancillary to the farmland. Rewilded land for BNG is also unlikely to qualify as used ‘for the purpose of agriculture’ given that specific statutory provision was made for other habitat schemes under the existing legislation.
Care needs to be taken too with Business Property Relief, on which a lot of capital tax planning hinges. Relief may be available at 100% on a business or an interest in a business which is wholly or mainly trading, or at 50% on land used in a business, which has been owned for at least two years.
Currently, relief is not available if the activities of the business are over 50% ‘investment activity’. Land let to a third party, most holiday lets and DIY livery constitute investment rather than trading activity for this purpose.
Provided the ecological mitigation scheme forms only a small part of the trading activity of the business, the relief may still apply.
It may be the case that the need to achieve a Biodiversity Net Gain will require work to and/or active management of the relevant land, which may contribute towards a business which is wholly or mainly trading.
But, fundamentally, it will be important to assess whether such a scheme might tip landowners into the wrong side of the wholly or mainly test, risking the loss of relief on the whole business.
HM Treasury has opened a consultation, calling for evidence on the taxation of natural capital schemes, the second part of which relates specifically to the availability of APR.
The responses will need to be considered after the 9 June 2023 closure of the consultation. Until HM Treasury then decides on any changes, current tax rules and structuring should be considered carefully. Given the timescales involved, the potential longer term tax loss could outweigh the financial benefit provided by the schemes in some circumstances.
The provision of Natural Capital offsetting schemes which have long-term effects i.e., nutrient schemes typically binding land for 125 years, and BNG is set to bind for a minimum of 30 years.
With such lengthy obligations requiring management costs for this period being imposed on estates it is perhaps best to have the next generation involved in the process.
Future of natural capital on estates
Before entering Natural Capital schemes, it’s vital to consider wider considerations which may impact your estate.
Could the use of previous fertile farmland as new habitats in order to provide BNG units perhaps have unintended consequences?
For instance, with the establishment of a new habitat for a minimum 30-year period, there is theoretically potential for the habitat to be classed as a Site of Special Scientific Interest (SSSI), placing far more restrictions on the use of your land.
However, with the vast amounts of pollution being pumped into our waterways and the desire to look
after the natural world, such schemes could be a viable means of looking after the country in the hands of those who know best.
BNG is already being secured by developers across England, with landowners entering into planning agreements with local authorities and commercial agreements with developers confirming that they will create and manage new habitats on parts of their landholdings in return for payment.
To protect the future of your estate it is essential to seek expert advice to consider the overall position before entering such agreements - both as to the ecological mitigation schemes and to the capital tax planning implications.
Climate change, biodiversity loss, food production, sustainability, natural capital are among the key buzzwords and phrases among landowners, farmers and land managers, with the key to aid, unlock and provide for each one of the above being land use.
The debate rages how to utilise this finite resource, ensuring the demands and needs are met across many different requirements, including food, energy, development and the environment. With the aforementioned issues certainly not going away, this provides a plethora of challenges alongside an almighty opportunity to benefit on all fronts. Natural capital markets is one key element of this, albeit in their infancy, and is certainly one of the most questioned topics with a lot of intrigue about how they will work and the benefits they will bring, not just environmentally, but also financially.
To aid providing a ‘sustainable’ farm and/or estate, establishing methods to harmonise environmental benefit with food production is integral. Our advice is to therefore undertake baseline assessments as a priority before integrating management changes as part of a medium-long term strategy.
In its simplest terms this would include productive land use for food, unproductive for other opportunities which will benefit the environment and provide financial return, whether it be biodiversity net gain, nutrient neutrality, woodland creation and carbon credits. We can assist and advise from start to finish on how best to approach these changes, model the potential benefits whilst also brokering deals for the sale of credits across the natural capital suite of options.
The future of land management has many hurdles but there are exciting opportunities for sustainable growth for businesses and the natural environment alike.
Hannah Bloxham
Director Land Management
