Updated guidance from HMRC on land used for environmental activities


Neil Steven

Neil Steven

Business Advisory Partner

28 July 2023


This article first appeared in the Spring 2022 edition of Scottish Land & Estates LandBusiness magazine.

Agriculture is going through the biggest change in a generation. Government policy is altering the landscape by seeking to introduce policies that work for farm businesses, food production and the environment (in terms of carbon and biodiversity).

While farmers and landowners are still being encouraged to produce food and other products in a sustainable way, a greater emphasis is being placed on their role in maintaining and improving the natural environment. Alongside this, new markets are appearing for them to exploit by using their land to generate credits to off-set the production of carbon and other gases connected to climate change.

HMRC has recently updated its Inheritance Tax (IHT) manuals where land is used under the Woodland Carbon Code (WCC) and Peatland Carbon Code (PCC). HMRC is of the view that the activities necessary to create, manage and maintain the land for the purposes of generating credits which can be sold to individuals, businesses or companies to off-set their emissions, or used to off-set the emissions of the landowner’s business, will in principle qualify for business relief in their own right. 

The manuals also state that the units generated by the land in question, including ‘pending issuance units’ (PIUs) – effectively a promise to deliver a carbon credit in future, based on predicted sequestration – will also qualify for business relief providing they are used in, or are an asset of, a qualifying business. 

These updates are a positive step forward in bringing greater clarity over the accounting and tax aspects for many rural businesses managing land internally across a variety of enterprises, although more is still required, including other relevant taxes at play.  

In situations where land is no longer being used for the purposes of agriculture, such land is unlikely to qualify for Agricultural Property Relief (APR) unless, for example, it is woodland that can be shown to be ancillary to other agricultural land. However, depending on how the land is used as part of the business, it is possible the land may still qualify for business relief if the overall business is not one or wholly or mainly making or holding investments.

The following example is provided in the HMRC IHT Manual:

Donald owns a 300-acre farm used for raising cattle and growing root crops. He decides to remove 80 acres of the land from agricultural production and enter it into an agri-environment scheme for which he receives grant payments. As the 80 acres is no longer being used for the purposes of agriculture it will not qualify for agricultural relief. However, as Donald’s business is still mainly one of farming along with the receipt of income from the agri-environmental scheme, the land will qualify for business relief as it is used in a business that is not wholly or mainly one of making or holding investments.

Note that if Donald was instead a non-farming landowner and leased the farm to a tenant, business relief would not be due. Agricultural relief would be restricted to the land still being used for the purposes of agriculture.

In the Spring Budget, one of the consultations released was a call for evidence in respect to taxation of environmental land management and ecosystem service markets – this consultation ends on 9 June.  The consultation asks for views around the impact of environmental schemes whereby relief from APR can be lost if the land “set aside” is no longer being farmed.  The consultation aim is to explore the extent to which the current scope of APR may represent a barrier (see example) and, if necessary, potential updates to the scope of the existing land habitat provisions in the relief.

While further guidance from HMRC is awaited, our specialist teams can support you with the correct accounting and tax treatment of your activities. Don’t hesitate to get in touch with our experienced Rural team.


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