HMRC clarifies the tax treatment of Ecosystem Service Payments: What rural landowners need to know

On 14 May 2026, HM Revenue & Customs (HMRC) published its long‑awaited technical note on the taxation of ecosystem services, providing important guidance for landowners participating in emerging environmental markets.

You can access the full note here: Technical note on ecosystem services - GOV.UK

The note addresses the tax treatment of payments linked to:

• Biodiversity Net Gain (BNG)
• Nutrient neutrality schemes
• Woodland Carbon Code
• Peatland Code

These schemes form part of the UK’s developing “natural capital” economy, under which landowners are increasingly rewarded for delivering environmental outcomes such as biodiversity enhancement, water quality improvements and carbon sequestration.

For rural landowners—and particularly for landed estates, farming businesses and charitable landowners, this guidance provides welcome clarity, albeit with important caveats.

Payments received: income or capital?

A key issue for landowners is whether receipts are taxed as trading income or capital.

HMRC’s starting point is that receipts for ecosystem services will usually be taxable as income, often as part of a trade. This is particularly likely where:

• The land continues to be actively farmed; or
• The environmental activity forms part of wider land management operations.

Where ecosystem services are delivered alongside farming activities, the receipts may simply be treated as part of the existing farming trade.

In some cases, particularly where land use is permanently restricted or sterilised, payments may be treated as capital receipts.

Special position for woodland

The technical note highlights an important distinction for woodland:

• Where land is commercially occupied as woodland, income and expenditure relating to ecosystem service credits (e.g. carbon units) may fall outside the scope of trading income.

This reflects the long-standing woodlands tax regime and creates planning opportunities for commercial woodland activities.

Expenditure: what relief is available?

HMRC confirms that the tax treatment of expenditure incurred in establishing ecosystem services depends on how the land is held:

• If part of a trade (e.g. farming), allowable expenditure may be deductible against trading profits;
• Where land is held as an investment, allowable expenditure may be deductible against property income in the normal way
• Capital expenditure may qualify for capital allowances in limited circumstances;
• Expenditure that is not deductible may be allowable against proceeds on disposal of the land.

Professional and project costs (ecology, legal, surveying) will require careful classification.

Tax treatment for developers and purchasers

The note also addresses the position of purchasers of ecosystem services, particularly developers:

• Payments for BNG units or nutrient credits may be tax-deductible in certain circumstances;
• For carbon credits, deductibility depends on purpose—particularly whether the purchase is for regulatory compliance or voluntary offsetting.

This distinction is likely to remain an area of uncertainty as carbon markets evolve.

VAT, SDLT and “stacking”

The technical note touches briefly on wider tax considerations, including:

• VAT: Supplies of BNG units and nutrient credits will usually be subject to VAT, making contract drafting critical. Special VAT rules will apply to carbon credits.
• Stamp Duty Land Tax (SDLT): This is only likely to be relevant where land is transferred or rights are granted, as payments for ecosystem services are not 'consideration' for SDLT.
• Stacking: Generating multiple income streams from the same land (e.g. BNG + carbon) is possible in certain circumstances.  The treatment of each income stream may be different.

Inheritance tax

The note provides no further detail on inheritance tax. 

• The extension of Agricultural Property Relief (APR) to land subject to environmental management agreements was included in a previous announcement.

Charities

For charitable landowners, additional considerations arise:

• Income arising from the creation of ecosystem services will benefit from the exemption on profits of a charitable trade, so long as the activities falls within the primary purpose of the charity based on its charitable objects.
• If, for example, the charitable purpose includes the preservation of land it is likely that the ecosystem activities will be within that purpose.

Practical implications for rural and charitable landowners

This guidance is a significant step forward, but it does not create a “one-size-fits-all” answer.

In practice, landowners should:

• Undertake a tax analysis early in project planning;
• Model whether receipts are likely to be income or capital;
• Take advice on the accounting treatment of the income
• Consider the impact on existing reliefs (APR, BPR, woodland relief);
• Review VAT clauses carefully in agreements;
• Seek integrated legal, tax and valuation advice, particularly for long-term schemes.

For charitable landowners, additional governance and compliance analysis is essential.

Key takeaway

HMRC’s technical note confirms that ecosystem service markets are now firmly within the UK tax landscape. While the general direction is clear, most receipts will be treated as taxable income, the details remain fact-specific.

How can Foot Anstey help?

Foot Anstey has specialist advisors in rural and landed estates, charity property, tax and succession, who can support businesses and charities through all aspects of natural capital projects.