It’s reasonable to say that we all, and especially our agricultural and landed estate clients, are keen to repair and protect the environment we live in, and to restore biodiversity, but can this be done without creating tax problems?
Faced with a number of clients asking us to advise on the benefits and implications of rewilding, and with a number of businesses now promoting products that will create income generative habitat banks, this is a question Helen Pennock put to Anthony Main, one of our rural tax specialists, who shares his thoughts below.
As with all such things, there is an element of uncertainty when it comes to rewilding projects, with doubts around the capital tax implications, specifically whether the use of land within a rewilding project will result in the loss of agricultural property relief (“APR”) from inheritance tax and whether it could restrict the availability of, say, rollover relief and/or business asset disposal relief (“BADR”) from capital gains tax.
Where farmers and landowners participate in environmental schemes such as the Habitat Scheme which was subsumed into the Countryside Stewardship Scheme and Environmental Land Management system, this should not create tax problems because such actions don’t tend to take land out of production but instead reward farmers and landowners for managing it in an environmentally friendly way.
Rewilding projects are unlikely to benefit from Agricultural Property Relief (“APR”)
However, unlike land farmed under the schemes mentioned above, I believe the consensus at present is that land used for rewilding will not qualify for APR due to the current narrow legislative definition of farming and agriculture.
Similarly, it is unlikely that land used for rewilding would qualify for relief from capital gains tax as it would not have been in qualifying trade use.
Business Property Relief (“BPR”) from inheritance tax could be an option
This may not be a major concern if, for example:
- A trade is carried on as part of the rewilding project, for example introducing ancient breed farm animals into the ‘wild’ area and selling them for meat; or
- A relatively modest area of land – particularly marginal land that may not be productive anyway – is set aside for rewilding such that, looked at in the round from a ‘Balfour’ perspective, a farm business is, in the majority, still trading.
In both the above cases I would expect business property relief (“BPR”) from inheritance tax to apply in place of APR, and for the capital gains tax reliefs to be retained.
Owners of let land need to understand what their tenants are doing
With inheritance tax in mind and in the absence of legislative change, rewilding may be a bigger issue for landowners who let their land and who will rely on what I call the “second leg” of APR from inheritance tax.
As I mention in our Autumn 2021 Agricultural Journal, let land is capable of achieving APR from inheritance tax, but only where the tenant occupies the land for agricultural purposes. It is therefore critical that landowners understand how their tenants are using the land.
Landowners who let land to tenants who pursue conservation goals need to be careful that the primary usage doesn’t tip over from farming to environmental delivery, as the second leg requires one’s tenant to be in occupation of the land for agricultural purposes.
Legislative change is needed to support the Government’s environmental goals
In my humble opinion, legislative change is needed to support the Government’s environmental goals.
There has been speculation that, to meet its environmental commitment, Government will have to adapt and update the definition of farming and agriculture. Indeed, one or two commentators have suggested the old ‘set-aside’ relaxation should apply, whereby, before the scheme’s abolition, farmers could set aside [if memory serves] up to 20% of their land, leaving it fallow, hence taking it out of agricultural use but without any reduction in APR.
I feel sure we will see some direction coming from Government in coming months, but for now, I recommend exercising care when entering into rewilding or similar projects, and that you speak with us to ensure your good intentions don’t leave you with capital gains or inheritance tax problems.