Biodiversity Net Gain (BNG) is the new buzzword making waves in the farming world. At first glance, it seems like a win-win: enhancing nature, contributing to environmental goals, and potentially unlocking new income streams in the absence of precious subsidies. But before you jump on the BNG bandwagon, it’s important to look a little closer. Could it be a hidden trap, bringing unforeseen tax complications along for the ride?
Let's break down what BNG could mean for you and your business—opportunity or risk?
The Promise and the Price of BNG
BNG requires landowners to ensure that any new development results in a measurable improvement in biodiversity. For farmers, this means playing a key role in achieving these goals. It could involve setting aside land for creating new wildlife habitats, such as wildflower meadows or hedgerows, or restoring degraded habitats like wetlands. These actions contribute to the 10% net gain target mandated for developments, turning your land into a vital part of the solution. Sounds idyllic, right?
However, most BNG agreements come with a long-term commitment, often 30 years or more. Such a lengthy period of land use restriction could significantly impact how your farm is treated under Inheritance Tax (IHT) rules.
If a BNG agreement is considered a long-term disposal, similar to granting a major interest in property, then for IHT purposes, such an agreement might be viewed as a disposal that affects the availability of Agricultural Property Relief (APR) or Business Property Relief (BPR). When there is a substantial change in the ownership or use of the land, it could disrupt the required ownership period for these reliefs and alter the property's status as "qualifying business property."
Stay in the Game: Protect Your Farm's Trading Assets
Even if you navigate around the ownership issue mentioned above, BNG can still have significant tax implications, particularly regarding APR and BPR. That's why understanding these reliefs is essential to protect your farm's trading status.
Agricultural Property Relief – The Basics: APR can offer up to 100% relief from IHT on land used for agricultural purposes. However, if too much of your land is dedicated to BNG activities that do not qualify as "agricultural", such as large-scale conservation efforts, you risk losing this valuable relief.
Business Property Relief – A Possible Lifeline? However, even if APR does not apply, BPR might still provide some hope. Case law, like those noted below, have taught us that as long as the farming business remains "wholly or mainly" (more than 50%) a trading operation, BPR could still cover the BNG parts.
Lessons from the Courts: What the Case Law Tells Us
Court decisions provide some guidance on how HMRC may view BNG activities:
Farmer [1999]: To qualify for Agricultural Property Relief (APR), land must be used strictly for farming. If not, APR could be lost. But the Farmer case also highlighted that Business Property Relief (BPR) might still apply if more than 50% of your activities are "trading," like traditional farming.
Earl of Balfour [2010]: Reinforced that APR only covers land genuinely used for agriculture. However, BPR might step in to provide relief, as long as your business remains mainly a trading operation.
While APR is strict about agricultural use, BPR offers more wiggle room, covering farms with a mix of uses, so long as the core business remains primarily trading. These cases suggest that while there is a potential fallback with BPR, it is still not a guarantee and the clock may be ticking on how long this interpretation holds. We shall see what October brings...
How to Protect Your Farm from the Hidden Costs of BNG
To navigate the potential pitfalls of BNG, here are some strategies to consider:
Keep Your Agricultural Identity: Ensure that BNG activities are designed to complement, not replace, traditional farming. Consider practices like rotational grazing that support biodiversity while maintaining agricultural use. Keeping more than 50% of your activities in traditional farming can help secure BPR.
Draft Agreements Carefully: Collaborate with legal advisors to ensure BNG agreements do not inadvertently shift the primary use of your land away from agriculture, or worse transfer long-term ownership. Agreements should allow for flexibility, such as grazing rights or cropping, which can help retain APR eligibility.
Monitor Your Trading Status: Regularly assess your farm’s activities and income sources to confirm that your business still looks like a trading operation. Maintaining detailed records showing that over 50% of your activities are agricultural can help protect BPR.
Educate Your BNG Consultant: Make sure your BNG consultant understands the importance of maintaining agricultural status and trading activities. Working together can help align biodiversity goals with your tax and business objectives.
Don’t Jump Too Soon: Think Before You Leap!
BNG is an exciting development, but it’s not without its pitfalls. With long-term commitments and potential tax consequences, it's essential to look before you leap. Before signing on to any BNG project, consider the impact on your tax reliefs and the flexibility of your farming operations. Speak to your tax advisor!
And Another Complication: Trading Profits or Capital Gains?
As you consider the implications of BNG, another potential tax complication comes into play—should the income from these initiatives be treated as trading profits or capital gains? This distinction matters because it can significantly affect the type and rate of tax you might pay. Understanding the right classification is crucial, and we'll explore this topic further in an upcoming blog.
Ready to Talk About BNG?
If you're considering a BNG project or want to know how it could impact your farm's future, get in touch. We're here to make sure that your next step is a smart one, for both your business and the environment.
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