Profiting from nature: the tax aspects 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 contemplating a BNG scheme.

What is BNG?

BNG requires that development projects deliver a measurable improvement in biodiversity. This can be achieved either on the development site itself 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 basic but crucial question is whether proceeds from BNG unit sales are taxed as income or capital gains.

For individuals, this distinction is critical due to the higher rates of income tax (up to 45%) compared to capital gains tax (up to 24%). For corporate landowners, the distinction is less impactful in terms of tax rate, but it does affect the timing and recognition of profits for corporation tax purposes.

Although the necessary environmental improvements for BNG might resemble capital expenditure at first blush, many 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 creation and sale of the BNG units themselves.

When viewed through a tax lens, a landowner in this scenario is therefore creating a new asset (the BNG unit) with a view to making a profit on its short-term sale. This has many key hallmarks of trading income for tax purposes, and it follows that profits from the sale of newly created BNG units are generally taxable as trading income.

Capital gains tax

Despite the income tax treatment of new BNG unit sales, capital gains tax may still be relevant. This is because if the environmental improvements increase the underlying land value, the associated costs may be deductible when calculating taxable gains on a future land sale.

However, these costs cannot be deducted twice – both from trading income and capital gains. Their deductibility depends on whether the BNG activity is classified as trading or investment in nature and, as is often the case in tax, one cannot have one’s cake and eat it.

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 though. This is because statutory units may arguably not be sold in the furtherance of a business, as would be required for VAT to be charged, but rather because a developer is required to buy them by law as a 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.

The distinction between these two cases can often be subtle and depends on the detail of the commercial deal between the parties and the terms of the relevant legal documents.

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% (please see our briefing on this here).

BPR is only available on businesses that are “wholly or mainly” trading as opposed to investment businesses. Planning for landowners in particular depends on striking the right balance between investment and trading activities across their estate. Where, as previously outlined, 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, August 2025