Profiting from nature: taxation of Biodiversity Net Gain

While much attention has been given to the environmental and planning implications of Biodiversity Net Gain (BNG), its tax treatment remains less explored. This guide outlines the key tax considerations for landowners.

What is BNG?

BNG requires developers to deliver a measurable improvement in biodiversity. This can be achieved either on the development site or off-site, with the latter offering landowners the opportunity to create or enhance habitats and sell the resulting BNG units to developers. 

BNG schemes therefore present a dual benefit for landowners: environmental enhancement and financial diversification. But how are these transactions taxed?

Income tax

A key question is whether proceeds from BNG unit sales are taxed as income or capital gains. For individuals, this matters because income tax rates can reach 45%, whereas capital gains tax (CGT) rates top out at 24%. For corporate landowners, the distinction is less impactful in terms of rate, but it does affect how and when profits are taxed.

Although the necessary environmental improvements for BNG might resemble capital expenditure at first glance, BNG schemes involve the creation of a new asset: the BNG unit. The sale proceeds from those BNG units do not therefore derive from any sale of the underlying land, but from the units themselves.

Viewed through a tax lens, a landowner is therefore creating a new asset (the BNG unit) with a view to making a profit on its short-term sale. This has many hallmarks of trading income for tax purposes, and it follows that profits from the sale of newly created BNG units are likely to be taxable as trading income. This is an important point for charities, who do not typically pay tax on investment income applied to charitable purposes, but can be liable to tax on trading income unrelated to their primary charitable purpose.

VAT

Government guidance on VAT and BNG has been, put generously, inconsistent. In February 2024 DEFRA initially suggested BNG unit sales would be subject to VAT, but this was later retracted following HMRC intervention. More recent guidance on statutory biodiversity credits muddied the water further. This guidance first stated that VAT should not be charged on statutory credits, but again this was swiftly retracted.

Currently, it appears that BNG unit sales made with a profit motive are subject to VAT if the seller is (or is required to be) VAT-registered. The VAT treatment of statutory credits is potentially more ambiguous, because they are not sold in the furtherance of a business, as would be required for VAT to be charged. Instead, the developer is required to buy them by law as an option of last resort (when on-site and off-site BNG units are not feasible).

Complexities also arise when BNG units are sold alongside VAT-exempt land. In such cases, the key question is whether the BNG units are ancillary to the land sale or constitute a separate supply. In the former case, no VAT may be chargeable, whereas in the latter VAT would be payable on the price attributable to the BNG units.

Inheritance tax

Although Agricultural Property Relief (APR) and Business Property Relief (BPR) are set to be capped at £1m from 6 April 2026, both reliefs continue to offer significant value to landowners, as qualifying property above that value will be taxed at half the headline rate of inheritance tax (at 20% rather than 40% – see our briefing here).

BPR is only available on businesses that are “wholly or mainly” trading as opposed to investment businesses. 'Balfour' planning for landowners in particular depends on striking the right balance between investment and trading activities across their estate. Where the creation and sale of BNG units can be structured as a trading activity for tax purposes, this may enhance the trading profile of the estate and support landowners’ inheritance tax planning objectives.

This publication is a general summary of the law. It should not replace legal advice tailored to your specific circumstances.

© Farrer & Co LLP, October 2025