Natural capital is the world’s stock of natural assets, such as forests, water, land, minerals and biodiversity. The UK has a Natural Capital Framework – an economic and ecological model which treats nature as a valuable asset and measures the vital ecosystem services they provide to humans.
As a landowner, it is important to understand the tax implications of changes made to your land in order to enter into schemes that advance environmental policies. The Clayton & Brewill team explain more in our blog.
Income from natural capital
Landowners can get paid for natural capital through government grants, private offsetting markets and environmental credits. The key ways landowners can earn money from natural capital include:
- Biodiversity Net Gain (BNG) – this involves landowners creating or enhancing habitats to sell biodiversity units to property developers under 30-year agreements
- Sustainable Farming Incentive (SFI) – this pays landowners for actions which protect soil, water and biodiversity alongside food production
- Capital Grants – these provide targeted funding for physical improvements such as planting trees, restoring hedgerows and managing water quality
- Carbon Offsetting – allows landowners to generate and sell carbon credits to businesses trying to reach net-zero targets
There are many more funding opportunities for landowners, which can be found on the government website and via private natural capital markets.
Tax from natural capital
Income and transactions from natural capital are typically taxed, with the tax treatment depending on whether they are classed as income or capital.
Environmental credits and management payments are generally classed as income tax. Income from environmental credits such as carbon units or BNG is taxable, unless it falls under specific exemptions such as commercially managed woodlands. Ongoing annual payments received for habitat management, land stewardship or maintenance are typically also treated as taxable income.
Capital taxes are likely to come from actions such as:
- Capital receipts – upfront lump sums or one-ff payments that reflect a permanent change or devaluation of land
- Disposals – selling land or natural capital assets can trigger Capital Gains Tax or Corporation Tax
Guidance for landowners
Natural capital schemes are relatively new and can be a complex area to explore, particularly as the nuanced tax rules interact with already existing frameworks. HMRC guidance emphasises the importance of seeking specialist tax advice before entering into any natural capital schemes to ensure you understand the tax implications before committing to a scheme. It is also beneficial to keep detail records of anything related to natural capital initiatives and to stay informed of any ongoing HMRC updates.
