The expansion of Biodiversity Net Gain (BNG), nutrient neutrality and carbon markets is creating valuable new income streams and opportunities for rural estates. After a prolonged period of uncertainty, HMRC’s technical note published on 14 May 2026 finally provides an important clarification about where these arrangements sit within the tax system – guidance that many in the sector had been awaiting for some time.
Most Receipts Will be Taxed as Income
HMRC’s starting position is that payments for ecosystem services will usually be taxed as income, rather than as capital. This includes receipts for BNG units, nutrient credits and carbon credits under schemes such as the Woodland Carbon Code and Peatland Code.
In many cases this income will be treated as part of a trading activity. For farming businesses this may mean ecosystem service income is incorporated into the existing farming trade where land continues to be farmed, or where the land taken out of production does not represent a substantial part of the overall holding.
Similarly, income generated from commercially occupied land will generally be taxed as trading income.
Limited Scope for Capital Treatment
However, HMRC recognises that not all arrangements are the same, and capital treatment may apply in more limited circumstances, particularly where payments compensate for:
- Permanent loss of use of land, or
- Effective sterilisation of the asset
Whether a payment is revenue or capital will depend on factors such as:
- The duration of the agreement
- The nature of land management obligations
- Whether the land retains any ongoing commercial or farming use
This reinforces the need to examine each scheme and agreement carefully, rather than assuming a uniform tax position. The key point to note is not simply that the distinctions exist, but that they will often turn on how agreements are framed and the underlying legal rights granted.
Woodlands: A Distinct Position
A notable exception applies to commercial woodland. HMRC has confirmed that income and expenditure relating to carbon or other credits generated on woodland land do not form part of a trade, preserving the sector’s distinct tax treatment.
Considerations for Buyers and Developers
The note also addresses the position for those purchasing ecosystem units:
- Payments for BNG units or nutrient credits may be deductible for income or corporation tax purposes, depending on the circumstances.
- The tax treatment of carbon credits depends on why they are acquired, particularly whether they are required for regulatory compliance.
This has practical implications when negotiating agreements between landowners and developers, again underlining the importance of aligning commercial terms with legal structure from an early stage.
Wider Tax Issues to Consider
HMRC highlights a broader range of tax considerations that landowners should factor into any deal, including:
- VAT: VAT commonly applies to supplies of BNG units and carbon credits
- Inheritance Tax: Relief such as Agricultural Property Relief may still be available, but outcomes will depend on how the land is used.
- Stamp Duty Land Tax: SDLT may be relevant where interests in land are granted as part of an agreement.
- Expenditure Treatment: The tax position of costs incurred in establishing ecosystem services will depend on how the land is being used.
- Stacking: Generating multiple environmental income streams (such as BNG and carbon) from the same land may introduce additional complexity.
The note also touches on conservation covenants, section 106 agreements and charitable structures, all of which may influence the overall tax analysis.
Individually, none of these issues are new, but in combination they create a landscape where tax cannot be considered separately from legal structuring.
Why Early Collaboration Matters
A consistent theme running through HMRC’s guidance is that outcomes depend heavily on detail. Labels alone will not determine tax treatment – substance will.
This makes early collaboration between legal advisers and accountants essential.
BNG and similar schemes are not simply income streams – they are long-term, land-based arrangements, often running for 30 years or more. The legal framework put in place at the outset will shape:
- How payments are characterised for tax purposes
- Whether land is seen as continuing in trade
- The extent to which land is restricted or “sterilised”
- Ongoing obligations and cost profiles
- Eligibility for reliefs such as APR
If tax and legal advice are considered in isolation, or brought in too late, there is a real risk that the structure will inadvertently drive an unfavourable outcome.
The Role of Legal Structuring
Legal input is not simply about documenting a deal; it is integral to shaping the tax analysis. For example:
- Choice of structure: Licences, leases, habitat management agreements and joint venture arrangements can lead to different tax outcomes.
- Drafting of obligations: The extent and duration of land use restrictions can influence whether payments are viewed as income or capital.
- Long-term controls: Section 106 agreements and conservation covenants can bind land for decades, affecting future development, financing and disposals.
- Stacking arrangements: Legal compatibility of different schemes is key to unlocking multiple income streams without conflict.
- Protection of reliefs: Changes in land use need to be carefully managed to preserve inheritance tax reliefs.
Each of these points sits at the intersection of legal drafting and tax consequence.
Practical Takeaway
For rural landowners who may be considering BNGs or similar schemes, the practical takeaway is less about any single tax rule and more about process:
- Expect most receipts to be taxed as income, but recognise that outcomes depend on structure.
- Engage both legal advisers and accountants at an early stage- and ensure they work together.
- Use that collaboration to shape the arrangement, rather than retrospectively analyse it.
- Consider long-term land use, restrictions and value implications carefully alongside the immediate income.
- Review VAT, contractual provisions and reliefs in the context of the full structure.
The Bottom Line
HMRC’s latest guidance is undoubtedly welcome, particularly given how long the sector has been waiting for a clear statement of position. However, it is not a prescriptive rulebook.
Instead, it reinforces a broader point: BNG and wider ecosystem markets sit at the intersection of tax, law, and land management. The most effective outcomes will be achieved where those disciplines are brought together from the outset.
For landowners, the opportunity is significant, but so too us the importance of getting the structure right before commitments are made.
This article was co-written by Neve McLennan, trainee solicitor, and Tom Graham, partner, in our Rural team.