Environmental Land Management and Inheritance Tax relief

Under the new ELM schemes, farmers and landowners are rewarded for farming in a sustainable way, under the Sustainable Farming Incentive (SFI). They can also be paid to support local nature recovery and the restoration of habitats, and large-scale tree planting.

Whilst farming land in an environmentally sustainable way should continue to attract 100% Agricultural Property Relief (APR) for Inheritance Tax (IHT) purposes, there is a concern that where land is taken out of agricultural production for the recovery of plants, wildlife and habitat protection, the qualifying conditions for claiming APR will not be met. Under current legislation, where land has not been owned and occupied for agricultural purposes immediately before it is transferred, relief is not available. Whilst farmers and landowners may, in certain circumstances, still qualify for Business Property Relief, the inability to claim APR could be a real barrier for farmers and landowners making long term commitments to take land out of agricultural production.

The Government has listened to concerns and has published a consultation document entitled ‘Taxation of environmental land management and ecosystem service markets’. The consultation is a call for evidence on how the tax system can better encourage private investment in ecosystem service markets (production and sale of carbon credits and biodiversity units), and a call for evidence to support a reform of APR, to include relief for land managed for environmental purposes under an environmental scheme.

The Government has made it clear that any reforms of APR will not benefit from land that did not previously qualify for relief. This could be an issue for farmers who have already diversified away from agricultural land use.

The Government’s review is welcome, as there has to date been little guidance from HMRC on the tax implications that the increasing number of environmental schemes can have, for farmers and landowners. In light of the Government’s ambition for net zero by 2050, we expect to see the introduction of further sustainability tax measures that encourage farmers and landowners to not only produce the food we need, but also to protect and enhance our natural environment.

If you have any questions regarding APR and the potential reforms, please get in touch with Kay Mind, Director. The consultation closes shortly, and we will provide further commentary when the Government publishes the results.

This article has been taken from our Private Client Summer Briefing 2023. Click here to read more.