Farming and environmental land management – the tax issues
Armstrong Watson has just submitted its response to a recent HMRC consultation on the taxation of land entered into various environmental schemes.
It struck me while drafting our response how much farming and land use has changed since much of the legislation was introduced. In addition to schemes such as Countryside Stewardship and the Sustainable Farming Incentive, where farming continues on the land, there are other schemes where land ceases to be used for growing crops or rearing animals.
Examples of these schemes include:
- Woodland schemes where payment is received for the sequestration of carbon.
- Peatland restoration projects, which are similar to woodland schemes.
- Biodiversity units – under the Environment Act 2021 developers have to replace and enhance habitat destroyed by a building project, and a landowner will receive a lump sum to take land out of agricultural use for up to 35 years.
- Nutrient mitigation schemes which may involve the creation of wetlands or woodlands.
The consultation document asked for views on the income tax treatment on receipts under these schemes, how expenditure should be treated, and whether the land will still qualify for Inheritance Tax Relief.
The Inheritance Tax position is the one that could potentially cause the most problems. Below are just some of the points we have highlighted as part of our consultation response:
- Firstly, at present Agricultural Property Relief (APR) is only available for land occupied for the purposes of agriculture, which broadly means the growing of crops or rearing of animals. The consultation proposes extending the definition of agriculture to land used in the above schemes, which is welcome. However, HMRC states it does not want land to qualify for APR under the new rules that does not qualify under the current rules. If this is introduced, greater record-keeping of historic land use will be required.
- Secondly, APR is only given on the agricultural value of an asset, which is its value if it can only be used for agricultural purposes. We have pointed out to HMRC that the definition of agricultural value is outdated and needs to be revised.
- Thirdly, many landowners who farm land in-hand qualify for Business Property Relief (BPR), which can be more generous than APR, because it is given on the full value of an asset. In recent years, HMRC has challenged some BPR claims on the basis that the land use was of an investment nature. Examples here include horse livery, caravan parks, and holiday cottages. HMRC has issued guidance stating that it considers land under some of the above schemes will qualify for BPR. This is welcome, but HMRC guidance cannot be relied on as it previously changed its guidance on holiday cottages to say they no longer qualified for BPR.
This is an evolving area where it is essential to take specialist tax advice before entering into one of these schemes.