Biodiversity net gain and the tax issues for landowners

Biodiversity net gain (BNG) looks to ensure that where land is being developed, the natural environment ends up in a measurably better state than it was before development. While BNG provides obligations for developers, it provides opportunities for landowners who may be able to sell BNG units. This however comes with a raft of tax issues, which we consider below.

Aloysia Daros
Published: 12 Jun 2023 Updated: 12 Jun 2023
Tax Personal tax Real estate

What is BNG?

Following the introduction of the Environment Act 2021, most section 106 agreements required for planning permission granted in England will have to deliver at least 10% biodiversity net gain from November 2023. Developers will need to create or enhance habitats in association with the development work, and this can be done either onsite or offsite. The habitat must be secured as a biodiversity gain site for at least 30 years, and Natural England are establishing a biodiversity gain register.


What opportunities does BNG bring for landowners?

BNG gives the opportunity for landowners to create or enhance habitat and sell the resulting biodiversity gain units to developers. This however comes with various complications, not least numerous tax and accounting issues.

Selling biodiversity gain units

There will be a legal mechanism to ensure that offsite biodiversity gains can be registered on the Natural England register of offsite habitats, and it is anticipated that the landowner will need to enter into a legal agreement with the local authority. As the developer will be required to commit to the required level of BNG at the outset, they may make a lump sum payment to the landowner.

From a tax and accounting perspective this causes many uncertainties:

  • If the lump sum payment is made on day 1 and imposes an obligation on the landowner for 30 years, is the income deferred over the life of the agreement or recognised immediately in the first year? The taxation of the lump sum payment and the accounting principles, which may defer the income, may not match.
  • If the transaction is taxable on day 1, but there are ongoing expenses for the next 30 years to ensure the continued productivity of the habitat, are those expenses deductible and if so against what, as there may not be any further annual income?
  • Is the transaction taxable to capital gains tax or is it income? It could be argued that the habitat has been created to allow the landowner to sell BNG units, so that it falls within the badges of trade and is subject to income tax. Equally it is likely it will affect the value of the underlying land and therefore an element of the transaction should potentially be taxed as a capital gain.

It is difficult to create a scenario where all aspects sit happily together, but we consider a possible solution. There is specific legislation that surrounds the taxation of lease premiums, with the lease premium taxed partly to income and partly to capital using a formula. This could fit well with the argument for the sale of BNG units to be taxed to both income and capital.

Ongoing expenses

One solution to the issue around relief for ongoing expenses could be to consider providing for the net present value (NPV) of future costs, with a reconciliation at the end of the 30 years. This could however present complications if there was a change of landowner with a reckoning up in the hands of the seller. The purchaser may then need to carry out an NPV calculation of the future costs. However, as the obligation and the costs may have affected the purchase price, these costs may have at that point effectively been capitalised.

A different solution may be to acknowledge that expenses incurred to meet obligations relating to a BNG agreement are allowable costs of a trade, which can be relieved against other income as they arise.

Capital gains tax (CGT)

The status of the land will also remain important for CGT reliefs such as holdover or rollover relief.

In order for holdover relief to be available on a gift, the land would need to be used in a trade or be eligible for agricultural property relief (APR). For rollover relief the land must be an asset used in a trade.

IHT position on change of use

Where land use has been changed to create natural habitat, the land may no longer be in agricultural use resulting in APR being lost. A properly managed habitat that includes a level of husbandry could however continue to be in agricultural use and therefore remain eligible for APR. This could have knock on effects beyond relief solely on the land, for example for the ‘farmhouse’.

Business property relief (BPR) may be available, but to qualify for the relief the business must be run with a view to a profit. This could be a difficult condition to meet where there is a large upfront payment for the BNG units followed by years of expenditure. We hope that HMRC will consider that land used to create BNG units could be looked at over the life of the scheme, and that it does qualify as a business activity carried on for profit. Otherwise why would businesses enter into such arrangements?

If the land used for BNG is part of the wider business, understanding its status will be important for wider IHT discussions. For example, where businesses are diversifying, remaining a business that does not consist wholly or mainly of making investments will be an important consideration.  How the land used to create BNG credits will be viewed by HMRC can be fundamental to the calculation.

It is hoped HMRC will acknowledge that as there are obligations on the landowner, this will be viewed as a trading enterprise for BPR and not an investment activity, nor in a worst case scenario an excepted asset.


The tax and accounting position of BNG units is very much a hot topic, and there are currently more questions than answers. While this article contains our thoughts on how the tax issues could be addressed, we look forward to HMRC confirming its view through guidance.

In the meantime, early discussion between agents, lawyers and accountants is strongly advised as in the absence of guidance from HMRC the wording of the section 106 agreements can play a fundamental part in the tax and accounting analysis.

By necessity, this briefing can only provide a short overview and it is essential to seek professional advice before applying the contents of this article. This briefing does not constitute advice nor a recommendation relating to the acquisition or disposal of investments. No responsibility can be taken for any loss arising from action taken or refrained from on the basis of this publication.

Tax legislation

Tax legislation is that prevailing at the time, is subject to change without notice and depends on individual circumstances. You should always seek appropriate tax advice before making decisions. HMRC Tax Year 2023/24.

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