What HMRC’s new ecosystem services guidance means for landowners

Environmental income has become part of everyday conversations for farms and rural businesses.

From biodiversity net gain to carbon and nutrient schemes, land is increasingly being used not just for food production, but to deliver environmental outcomes. For many, this creates new opportunities, but also new questions.

One of the biggest uncertainties until now has been tax.

HMRC’s latest guidance on ecosystem services is a big step forward. It doesn’t answer everything, but it does give a clearer framework for how these payments are treated and what that means in practice.

Put simply, these are payments made to landowners in return for delivering environmental benefits.

That could include:

• Improving biodiversity (e.g. biodiversity net gain)
• Reducing pollution in watercourses
• Capturing carbon through woodland or peatland

In many cases, these agreements run for decades and come with ongoing management commitments. They’re not quick wins; they are long-term business decisions.

The main takeaway is that ecosystem services are now firmly recognised within the existing tax system.

In most cases:

• Income from these schemes will usually be treated as taxable income, often as trading income as part of an existing farming or land-based business.
• Only in limited situations, for example, where payments compensate for permanent loss or sterilisation of land use are receipts likely to be treated as capital.
• Multiple taxes can apply depending on how the arrangement is structured, including Income Tax, Corporation Tax, VAT and Capital Gains Tax

In practical terms, HMRC’s view is that these payments will usually be treated as income arising from land management activities rather than proceeds from disposing of land itself. That distinction matters when it comes to how profits are taxed and reported.

HMRC also confirms that ecosystem income may still form part of a farming trade even where parts of the land are taken out of agricultural production, depending on the scale of the change and the overall farming activity.

The guidance also touches on inheritance tax treatment, including the interaction with Agricultural Property Relief for land subject to environmental management agreements.

Until now, uncertainty around tax has made it harder to assess whether these schemes stack up commercially.

This new guidance helps you:

• Compare environmental income with traditional farming income more confidently.
• Understand how profits from these agreements are likely to be taxed.
• Plan ahead before entering long-term arrangements.

For some businesses this is the missing piece to enable informed decisions around proposed schemes.

While the direction is clearer, the detail will still depend on the specific agreement and how the land is used.

Things that need careful thought include:

• How the agreement is structured
• Whether the land remains part of your farming trade
• How costs and setup expenses are treated
• The long-term impact on land use, value and succession

HMRC has also clarified that biodiversity net gain units are generally subject to VAT when supplied by a VAT-registered business, although the practical VAT position may still vary depending on the type of arrangement and environmental credits involved.

And remember, this is a technical note issued by HMRC, not the legislation itself. It is a good starting point for assessing a proposed scheme, but specialist advice is recommended to explore its application.

One of the biggest risks we see is viewing these schemes as just another income stream. They are not; this is a strategic decision and most ecosystem service agreements:

• Run for over 30 years
• Restrict how land can be used in the future.
• May affect borrowing, succession and estate planning.

That means the decision should sit within wider business and family planning, not just short-term income needs.