Farmers advised to check tax implications of BNG agreements

Accountants have warned that farmers will need to look at the fine print of their individual contract to understand the full taxation implications before entering into a biodiversity net gain (BNG) agreement.

Gary Markham, director of tax advisers Land Family Business, said the new planning requirement to deliver an uplift in biodiversity following development has created a substantial opportunity for landowners to obtain private funding for habitat management.

However, BNG agreements also bring significant taxation implications that can impact the wider farming business, so appropriate planning and structures need to be put in place to minimise the tax risks.

See also: How farmers can benefit from Biodiversity Net Gain

Wording and interpretation

“Because these are new schemes, the tax treatment relies heavily on the wording and interpretation of the specific contract,” he said.

“We are having to examine each individual contract to consider how the cash sums will be taxed.”

Mr Markham says effort and care should be taken to ensure, where desired, the farmer is able to still trade on the land and retain the valuable associated tax reliefs. 

“Depending on the type of contract, some of the money received may be taxed as income and some as capital, giving a significantly different tax charge from 45% to 20% respectively,” he said.

“Some agreements also contain leases, which again can lead to part income/part capital considerations.”

Cash sums

Some schemes provide substantial cash sums in advance of a 30-year management obligation and existing tax legislation does not provide clarity on the overall treatment of these. These sums may result in substantial inheritance tax (IHT) liabilities.  

At present it is possible to receive an amount of rental income from partnership assets and still retain the IHT relief on those assets under a “Balfour arrangement”, where if the farm on the whole is more than 50% trading, relief is available in full on both the trading and investment assets of the farm.

However, if a relatively substantial area of the farm is leased to a third party, this could jeopardise the inheritance tax relief of the business.

The schemes available range from the payment of an upfront capital sum for a 30-year management obligation to an annual lease payment alongside an annual management fee.