HMRC’s ecosystem services guidance: What it means for landowners

For land‑based businesses, this is an important update. These schemes can lock up land for 30–75 years, reshape farming operations, and create new income streams. Understanding the tax position is essential before negotiating any deal.

The new guidance brings some clarity, but there are still significant gaps, and we are continuing to work with HMRC and professional bodies to iron these out.

We have summarised below where we are now and where more guidance is required. 

For most farming businesses, ecosystem service receipts will continue to be taxed as part of the farming trade. This is important because it may preserve access to benefits such as:

• Profits averaging
• Sideways loss relief
• Potential inheritance tax advantages

This applies even where land is taken out of production, provided it is not a “substantial” part of the holding. The lack of a definition of “substantial” is one of several areas where further clarification is needed.

For estates or landowners not carrying on a farming trade, ecosystem service activity is treated as the commercial occupation of land, with receipts ordinarily taxed as trading income.

For woodland managed commercially, income from ecosystem units is generally not subject to income tax or corporation tax.

If woodland is not already commercially managed, or stops being so because of the scheme, this exemption is lost.

Peatland has no exemption: Receipts are taxable as trading income.

Payments may be treated as capital if they compensate for the permanent “sterilisation” of land. This is a fact‑specific assessment and could be relevant where long‑term covenants restrict future use.

Where the ecosystem service agreement is between a developer and an intermediary (such as a habitat bank), the tax treatment will depend on the specific arrangement. For instance, if the intermediary takes an interest in the land and makes payments akin to rent, receipts will be property income and not part of any trade. However, where the intermediary does not take an interest in the land, payments will be treated as trading income.

Where the landowner receives payment from the intermediary for managing the land, this will be trading income. 

Where ecosystem services sit within a farming trade, most associated costs – ecological surveys, legal fees, habitat creation and management – should be deductible.

For commercial woodland, costs are not allowable (in the same way that the income is not taxable). For non‑commercial woodland, they generally are.

Capital allowances may be available on certain habitat‑creation expenditure, depending on whether or not the expenditure qualifies as plant and machinery.

We still await clarity on how income and costs should be recognised for accounting purposes. The guidance confirms that where landowners report on the cash basis, income should be reported when it is received, and for those reporting on the accruals basis, it should be reported under the UK GAAP framework.

However, the guidance is light on detail when it comes to matching costs against income, which is a practical problem for landowners because:

• Many schemes pay income upfront
• But costs (maintenance, monitoring, reporting) run for decades
  This mismatch could create significant tax distortions.

Further guidance is awaited on the accounting treatment of ecosystem services, and how these are aligned with the updates to the FRS financial reporting regulations (which came into effect on 1 January 2026). Ultimately, the tax treatment will follow on from the accounting treatment.

We continue to work with the ICAEW, so watch this space. 

BNG units sold by a taxable person are subject to standard‑rate VAT.

Statutory biodiversity credits sold directly by the government are outside the scope of VAT.

For voluntary carbon credits: 

• First issuance is usually outside the scope
• Secondary sales of verified credits (such as WCUs or PCUs) are generally VAT‑able

SDLT does not apply to ecosystem payments alone but may apply where a land interest or conservation covenant is created.

From 6 April 2025, land under an environmental management agreement will qualify for agricultural property relief (APR) without restarting the ownership clock. This is a significant reassurance for farmers and estates shifting land from agricultural production to environmental delivery.

Where ecosystem income is treated as trading income, this may also strengthen business property relief (BPR) claims under the Balfour tests.

Where multiple environmental outcomes are generated from the same land (eg carbon and nutrient reduction), HMRC requires each income stream to be treated separately for tax purposes.

Where the landowner is a charity, income from ecosystem services may benefit from the charitable trade exemption, provided the activities fall within the charity's primary purpose, such as environmental preservation.

Ecosystem markets are becoming a mainstream land‑use option. The tax framework is emerging, but not yet complete. Before entering a long‑term agreement, landowners should:

• Keep detailed land‑use and management records, including baseline surveys
• Understand how the agreement affects farming status, woodland management and future land use
• Consider IHT implications early, especially where APR or BPR is important to succession planning
• Seek professional advice before signing any agreement, particularly where stacking or intermediaries are involved

These schemes can provide valuable new income streams and deliver real environmental benefit, but only if the tax position is properly understood from the outset.

Approval code: NTEH7052622