The CLA has for several years been lobbying the government in relation to the tax consequences of environmental land use. Two of our major requests have been for the expansion of inheritance tax reliefs and greater clarity on the tax treatment of payments for such activity. We believe that both are needed in order to avoid tax deterring landowners from entering into environmental schemes.
HM Treasury and HM Revenue & Customs have now launched a call for evidence and consultation paper that covers both of these issues. The first part is a call for evidence on the taxation of ecosystem service markets, while the second is a consultation on the expansion of agricultural property relief from inheritance tax.
This represents a major success for the CLA’s lobbying efforts, but we need information from members to help with our response.
Part 1: Call for evidence on the taxation of ecosystem service markets
The call for evidence examines areas of uncertainty around ecosystem service payments. The government aims to provide greater certainty in this area, as we have requested.
This is the fact-finding part of the paper. It is about how the markets are operating, how agreements are structured and what tax uncertainties they give rise to. The focus is more about income tax than inheritance tax: how payments from the sale of the units (carbon, biodiversity net gain or nutrient neutrality) are accounted for and recognised from a tax perspective. For example, if a large upfront payment is received under a 30-year agreement, how is this taxed when there is a timing difference between upfront and ongoing project costs?
To assist in the preparation of the response, we’re calling for members to let us know if they have entered into, or are considering entering into, an agreement to sell biodiversity net gain units or nutrient neutrality units, or a conservation covenant.
If you are entering into these agreements, please get in touch and provide us with more information, including:
- How is the deal structured?
- What are you agreeing to do on the land?
- How long is the agreement for?
- How are the payments made - one-off at the outset or in stages?
- Can you provide a copy of any agreements (treated in confidence)?
Part 2: Consultation on agricultural property relief from inheritance tax and environmental land management
The consultation is focused on a proposed extension of Agricultural Property Relief (APR) to cover environmental land management. It acknowledges the concerns that have been raised by us and others, that the current scope of agricultural property relief is one potential barrier to some agricultural landowners and farmers making long-term land use change from agricultural to environmental use.
The tone of the consultation suggests that the government accepts in principle the CLA’s arguments that this extension is needed, and that the aim is to clarify the precise boundaries of the extended relief. The CLA’s response will therefore aim to ensure that the boundaries are drawn sufficiently wide so that members diversifying into environmental land management are not disadvantaged.
The government is not currently proposing to make an extension to business property relief, perhaps as it believes this can be dealt with by guidance alone. HMRC have confirmed in their manual (and repeated in the consultation) that land in the woodland carbon code and peatland carbon code will qualify for business property relief. The CLA is working with HMRC so that they understand biodiversity net gain and nutrient neutrality agreements, in order to produce similar guidance for these agreements, and hopefully, Environmental Land Management schemes (ELMs) too.
Scale of the Problem
The first question in the consultation focuses on the areas of concern in respect of agricultural property relief and environmental land management. It requests evidence and scenarios, including the relative scale of the concern by explaining where decisions about land use change have and have not been influenced by agricultural properties.
If concerns about losing inheritance tax relief have had an impact on your decision making, does this mean that you:
(a) are not taking land out of agriculture for environmental/ecosystem services; or
(b) are restricting how much you are doing and would do more if APR was available? Please contact us and provide details of what you would do and how much land would be used for environmental/ecosystem services management.
Design of relief
The consultation states that the policy objective for changing the inheritance rules would be to prevent the potential loss of the relief being a barrier to landowners/farmers entering into ELMs or their equivalent in other parts of the UK. The government wants to design the policy in a way that ensures that land taken out of agricultural production permanently or for an extended period for this reason does not lose relief. However, they want to ensure that this does not the lead to unintended consequences, such as land that has never been agricultural or used for agricultural purposes receiving relief.
Environmental Land Management scheme
The consultation confirms it is not intended to include land in all elements of the government’s ELMs, only that in Countryside Stewardship (CS) and landscape recovery. Their reasoning is that land the Sustainable Farming Initiative (SFI) will still be used for farming and so will qualify for relief in any event.
In our discussions with the Treasury and Defra, the CLA has always been clear that the availability of inheritance tax relief is only an issue for land that is taken out of agricultural use. We would be concerned if the definition of qualifying government schemes is too narrow to take into account future changes.
For example, if in the future there are elements of SFI which are ‘non-agricultural’ (such as field corner management), there may also be complexities with overlaps between land parcels in both SFI and CS.
The consultation proposes that in order for non-agricultural land in environmental land management to qualify for agricultural property relief, there would need to have been undertakings given, and ongoing adherence to those undertakings at the point of transfer. This means the relief would not apply where undertakings had been terminated, expired, or were not being adhered to.
It is hard to argue that agricultural property relief should be available for land that is registered in a government ELMs where the landowner is failing to comply with the conditions of that scheme. However, we would not want a situation where relief would be denied due to a minor breach of the scheme’s rules, especially if this may occur outside the control of the landowner.
The government is proposing to remove relief for historic habitat schemes. However, it does not know whether any land is still subject to these schemes.
Are you managing land under any of these historic habitat schemes?
(a) regulation 3(1) of the Habitat (Water Fringe) Regulations 1994;
(b) the Habitat (Former Set-Aside Land) Regulations 1994;
(c) the Habitat (Salt-Marsh) Regulations 1994;
Prior agricultural use
The consultation considers how to design the relief to exclude land that could not have previously received agricultural property relief. The government gives the example of waste land bought to go into a scheme. Any restriction on the previous use of land must allow for the relief to apply to land that was previously in agricultural use but had been changed to environmental land management prior to any change in the law to expand the scope of the relief. Otherwise, the legislation would penalise those who acted earlier to put their land to environmental use.
It would not be helpful if any limitation gave rise to evidential issues as to proof of prior agricultural use or makes it difficult for HMRC to assess claims for relief.
Rock review - Limitation of agricultural property relief
The consultation also seeks views on the recommendation in the Rock Review of agricultural tenancies that 100% of agricultural property relief should be restricted to Farm Business Tenancies of at least eight or more years and secure agreements under the Agricultural Holdings Act 1986.
The CLA believes that there is real concern that short-term lettings will be unattractive to landowners altogether, and they will instead seek other joint venture agreements. It is a big step for landlords who currently let for three or four years to suddenly let for eight. In many cases there are good reasons for letting for the short term (specialist cropping, new entrants, development, estate planning for future viable holdings etc). The use of break clauses is commonplace in Farm Business Tenancies and provides flexibility to the tenant too. There is a real risk that HMRC will have to start looking at a long list of exclusions and then the detail of individual agreements to ascertain how agricultural property relief is applied.
What do you think of the proposal to limit agricultural property relief so that it only applies where land is let for a term of eight years or more?
Member thoughts on these proposals are invaluable for our team. Please email CLA Chief Tax Adviser Louise Speke at firstname.lastname@example.org by 19 May with answers to the questions posed.