HMRC’s first UK-wide dedicated guidance note on the tax treatment of ecosystem service payments, published on 14 May 2026, provides welcome clarity for a market that has, until now, operated with considerable uncertainty. The guidance covers BNG, nutrient neutrality, the Woodland Carbon Code and the Peatland Code, and explains HMRC’s position across a range of taxes, both income and capital. 

For landowners, the guidance is helpful – but it also reinforces the importance of careful planning before entering into long-term environmental agreements.

A growing part of rural diversification

The four schemes covered by the guidance are different in scope and structure.

BNG is mandatory in England and requires most developments to deliver a 10% net gain in biodiversity. This can be achieved on site, off site through the purchase of BNG units, or through statutory credits as a last resort. Off-site BNG units must be secured for at least 30 years.

Nutrient neutrality applies in specific English catchments where development must not increase nitrogen or phosphorus entering protected water environments. Developers typically meet this requirement by purchasing offsetting credits from landowners within the same catchment, often under long-term agreements of 75 years or more.

The Woodland Carbon Code and Peatland Code are voluntary, UK-wide markets that enable landowners to generate carbon-related units through woodland creation or peatland restoration. These credits can be traded and are commonly used for offsetting or investment purposes.

From a property perspective, these schemes can create new income streams, but they may also affect land use, management flexibility, valuation, succession planning and future sale or development options and so require careful consideration. 

Income, not necessarily capital

One of the key messages from HMRC’s guidance is that receipts from ecosystem services will usually be taxable in the hands of the landowner, normally as trading income. Where a landowner has a farming trade on the land where credits or units are created, receipts will form part of that farming trade, provided the land continues to be farmed, or the amount taken out of farming is not substantial.

This is an important point. Some landowners may assume that long-term commitments – particularly those lasting 30 to 75 years – are more likely to be treated as capital in nature. HMRC’s position is that the length of commitment is relevant, but not definitive. Payments will normally be income rather than capital, unless they compensate for the loss of use and permanent sterilisation of the land asset.

In practical terms, this means ecosystem services should generally be viewed as a revenue diversification opportunity rather than a capital disposal strategy.

Structure matters

The detail of how an agreement is structured will be critical. Taking land out of agricultural production at scale, creating a separate environmental enterprise, or involving an intermediary can all affect the overall tax and commercial position.

For landowners considering an ecosystem service agreement, key property considerations include:

• how much land is being committed
• how long the obligation will last
• whether the land can remain within the existing farming business
• the impact on future sale, letting, refinancing or succession
• whether the agreement restricts other land uses
• who is responsible for establishment, monitoring and ongoing management
• whether an interest in land is being created

These questions are not just technical. They go to the heart of whether a scheme is commercially viable and whether it supports the wider objectives of the landowner.

HMRC’s guidance provides welcome clarity for landowners, developers and advisers operating in the ecosystem services market, and not before time. However, this remains a technical and evolving area. Before entering into any agreement, landowners should consider both the property implications and the potential tax consequences, and take appropriate advice.

Further information

Contact James Greenland