I've had time to look over HMRC's much awaited Technical note on ecosystem services this Bank Holiday weekend. This covers the range of ecological benifits, or ecosystem services a landowner may provide, be they statutory on non-statutory. Here, I'm looking from the landowner's perspective, as a creator of biodiversity net gain and nutrient neutrality units.

As we were initially led to believe, payments for ecosystem services will normally be taxable as income of a trade. Where receipts follow the existing trade this will usually indicate that they are receipts of the trade for income tax and corporation tax purposes. Where a landlord lets land and the lease provides for additional payments to the landlord to become due when the tenant receives income from providing ecosystem services, then the receipts will be of that proporty business.

As farming in the UK is treated for income tax purposes as the carrying on of a trade, where the included land on which the units or credits were created is still farmed, the receipts will form part of the farming trade - whether directly from the developer or via an intermediary (unless woodland and/or where the intermediary acquires an interest or provides land management). If the land is no longer farmed, the receipts are likely to form part of the farming trade if that land is not a substantial part of the whole on which farming is continued - tax rules such as averaging will still apply.

If the land is not otherwise used for a trade or property business (and not woodland) this is a commercial occupation of land and income will be treated as trading income. Equivalent rules exist for corporation tax.

Whether receipts are capital or revenue may be decided if receipts are for compensation for loss of use of the land where permanent sterilisation of the asset occurs. Continued use as a farm with maintenance of the ecosystem service as part of the farming activities, means the income will be trading receipts of the farm even though the duration of the commitments may exceed 75 years. Where receipts are not part of a trade or property business and is held to be capital, then capital gains will apply.

Expenditure by the landowner to secure ecosystem services, if being held for trade - a farm - it is likely that it will be allowable against the taxable income of the farming trade. With property businesses, the normal rules for taxation of property income will apply, including taxation of premiums and reverse premiums if relevant.

Where the expenditure is not allowable against income it may be allowable in computing any capital gain or loss on the disposal of the property.

Stacking is where BNG and NN credits or units are generated on the same piece of land and receipts and expenditure for each activity included in the stacking should be considered separately. Carbon and other types of services are dealt with differently and there may be the ability to stack Carbon in the future.

Where the land providing ecosystem services is held as a capital asset and is sold, sale proceeds may be subject to Capital Gains Tax (CGT) or Corporation Tax (CT) on chargeable gains. Subject to the normal reliefs.

BNG Units are tradeable instruments, with either Local Planning Authorities or the responsible bodies enforcing the projects and ensuring delivery of the required units therefore, where these Units are supplied by a taxable person in the UK, they are subject to VAT at the standard rate.

Inheritance tax legislation deals with agricultural relief from IHT for land subject to an environmental management agreement, which includes ecosystem services. It applies to deaths and other transfers of value, including lifetime gifts and charges on relevant property trusts, on or after 6 April 2025.

As always, seek specialist tax advice in what coud be a complex area.