A planning requirement for most housing, commercial and industrial developments in England to result in a 10% biodiversity uplift offers rural landowners an opportunity to generate a diversified income stream from their land.
However, with agreements typically running for 30 years and question marks over tax status and how land can be subsequently farmed there is much to consider.
The planning requirement applies in England from the start of next year and is known as biodiversity net gain (BNG).
It was introduced as part of the 2021 Environment Act to ensure that developers leave the natural environment in a measurably better state than it was before development.
In many cases, housebuilders and others will pay farmers to meet their BNG obligations as it will be difficult to do so on the building sites themselves.
Some landowners, including the Cornwell Manor mixed farming estate, near Chipping Norton, are already creating biodiversity units by establishing hay meadows, grassland and hedgerows, often on former arable land and being paid for the offsetting these will provide.
At a recent Farmers Weekly event at Cornwell Manor, hosted by business editor Suzie Horne, experts offered advice on agreements and the associated legal and tax considerations.
Broadly speaking, there are three models for landowners who want to get involved in providing off-site units.
One is through an agreement with a habitat bank provider in return for rent and management payments.
The land bank will then take a secure interest in the land, typically through a lease – often a farm business tenancy – and design and establish the site.
It will then sell the resulting units to developers.
Another option is for landowners to create their own habitat bank and deal directly with a developer.
The third is to create the habitat bank, but to use a broker to act on their behalf to line up deals with developers.
Which of these to opt for mostly hinges on a landowner’s appetite for risk, said Tom Mason, head of land (south) at Environment Bank.
He suggests there are three key points to consider for landowners who want to enter this market, including certainty of timing.
The first is payment – understanding when these will start and how they are structured is important.
There is a wide range of arrangements, from annual payments to front-loaded lump sums, and some with little certainty of payment, depending on the terms. The planning process may slow delivery in some cases.
Certainty of liability is important too.
“If you are a landowner working directly with a developer or as a direct provider of units, you take sole liability for delivery of those units.
“So if any of the habitat fails, you are solely responsible for rectifying that situation, as well as undertaking all the monitoring and reporting throughout the lifetime of the agreement,” he said.
Payment stream also ne eds to be considered.
“Understand how the payment is going to look and the tax implications that might have for your business.
“Is it going to be lumpy income, where you are going to get potentially a lump of money upfront and then nothing else for the rest of the agreement?
“Or are you going to have annual payments for 30 years over the lifetime of that agreement?”
How BNG units are created
Biodiversity units on land that a farmer wants to commit to BNG offsetting are calculated using a Defra metric that considers the baseline of the existing land and the planned biodiversity enhancement.
The metric calculates the BNG uplift and the number of units a landowner will have available to sell according to the plan for habitat creation.
As an example, arable reversion to low input grassland could be worth five or six units a hectare at the higher level, depending on the baseline condition of that land.
Environment Bank ecologist Tom Rothero said everything from site selection to a management plan needed to be thought out.
Look at where biodiversity can best be delivered without it negatively affecting the farming business, he advised.
This might be low yielding land that requires significant inputs to achieve its potential as productive farmland.
The biggest cost to farmers is the lost opportunity to farm that land, and payments are unlikely to be high enough to compensate for taking better quality land out of production.
Take the current use of the land into account and also the management and existing ecological features, such as hedgerows, ponds and blocks of woodland.
“It is better to have something to build upon than to start from scratch in a general sense,” he advised.
Planning and permits may be required to establish features such as wetlands and ponds.
An assessment from a suitably qualified ecologist is needed establish the biodiversity baseline of a potential site.
Soil chemistry needs to be ascertained – if, for example, the land is high in phosphorus, a process known as nutrient stripping may be required and this can take time to achieve.
A management plan must be created to set out how the target condition of habitats will be achieved and then maintained for the 30 years of the agreement.
Contingency measures should be built into that plan detailing how the situation will be rectified if a habitat fails.
While BNG seems to offer good opportunities for landowners there are pitfalls too, not least uncertainty over how land in an agreement may be farmed after the 30-year period ends.
Harvey Davies, a solicitor in the planning and environment team at Thrings, said it is likely that the land will be subject to environmental impact assessment (EIA) regulations before it can be brought back into use for productive agriculture.
The prospect of further restrictions being introduced during the lifetime of the project cannot be ruled out, he said.
“A question I get asked a lot is what happens after the 30 years, can you just rip it up and go straight back to arable?” said Harvey.
“I think the answer is almost certainly no. It is likely that those habitats, if you want to revert back to agriculture, will be the subject of EIA regulations.
“Or if there is woodland involved, there will be tree felling licence requirements under the Forestry Act, so it is going to be quite difficult to revert back.”
What a landowner is seeking to deliver will be set out in a legal agreement known as a Section 106 agreement with the local planning authority (LPA), or in a conservation covenant agreement with a responsible body.
Defra has yet to announce who these bodies will be.
The obligations in the agreement are enforceable, so if there is any dispute over these, the LPA or responsible body can seek a court injunction to ensure they are correctly delivered.
Cost projects carefully
There are also costs to take into account, such as registering a scheme with the off-site BNG register managed by Natural England.
“There will be a fee for this, and that looks likely to be several hundred pounds, possibly over £1,000, depending on the size of the scheme,” Harvey explained.
As well as the capital cost of establishing a scheme, there are ongoing management and maintenance expenses, and monitoring and reporting payments.
“There is likely to be quite a big monitoring fee to be paid to the LPA or responsible body.
“They are going to be involved quite heavily in monitoring these schemes and will need to recover their costs for doing so.”
Harvey advised landowners to properly cost out a scheme and decide what their revenue price point needs to be.
“There is a lot of talk about the substantial sums of money that are available for biodiversity units, but it is worth reflecting that there is going to be quite a bit of work to do.”
Projects must deliver biodiversity benefits above any existing obligations on the land, such as those of agri-environment schemes.
It is also important before considering creating BNG habitats to check for any restrictive covenants which might preclude this, advised Harvey.
However, BNG can contribute to wider nature recovery plans in addition to local objectives.
Everyone with an interest in land designated as a habitat bank must be party to the section 106 agreement, including the bank if the land has been offered as security.
How land is valued when it reverts to habitat can have repercussions for the rest of the farming enterprise, Harvey warned.
“If you go to the bank in the future, and say I need some more cash they might say, ‘we have got a problem here because you don’t have enough security because of the scheme you have in place’.
“As a consequence they might not really be prepared to advance you the facilities that you want.’’
Consider farm’s developmental needs
Farmers will also need to provide the minimum 10% BNG uplift for their own development projects – for example, for new intensive livestock housing.
However, class A agricultural development and the permitted development right, Class Q, are exempt from the 10% uplift requirement.
Although the potential earnings from BNG units are substantial, clarity is needed from HMRC on how these payments will be treated for tax purposes, and in particular whether the change of use of the land will affect agricultural property relief (APR) from inheritance tax (IHT).
BNG tax considerations are currently the subject of a consultation, which ended on 9 June. This considered both income and capital tax aspects.
Income or capital?
Neil Berry, a partner in accountant MHA, said it was possible that payments could be treated as income or capital, or a hybrid of both.
“It is infinitely possible to make it an income payment through the 30-year period, but I suspect there will be arguments over whether are you creating a capital gain in some respect.
“For there to be a capital gain, there needs to be a disposal of something – but what is that disposal?
“You are keeping hold of the land, but you have probably disposed of some form of right, or similar.”
APR is another area on which the industry is awaiting HMRC guidance, but Neil said that with some habitat schemes already on the statute books as qualifying for APR, it would be relatively straightforward to include new ones.
However, the valuation of land in schemes would become more challenging.
It is likely that BNG credits, as they are tradeable, will be liable to VAT, but only Defra has stated this; HMRC has yet to commit.
“Input tax deduction will require careful planning – for example, a developer paying for works which create credits on someone else’s property may find that this creates an irrecoverable VAT cost,” he cautioned.
As well as the potential income and tax unknowns of BNG, Neil said there are important business structure and generational considerations in entering such an agreement.
These would include questions about the long-term aims of family member – how the land should be held and by whom.
Event host: Cornwell Manor
- A 33.5ha habitat bank at the 800ha Cornwell Manor estate is generating an alternative income stream.
- Estate owner Alexander Ward opted for an agreement with Environment Bank.
- Large-scale habitat creation and restoration project is under way alongside a wetland, which he has been working on for many years.
- Existing parcels of grassland are being enhanced and restored. Areas of arable land are being reverted to grassland and managed as hay meadows for the benefit of wildlife.
- These areas are grazed at a lower intensity with cattle and sheep owned by the estate and a grazier, so the land is able to continue producing food while providing wildlife habitat.
- New ponds are part of the project. Scrub is being established to allow fields to merge with existing woodland and species-rich hedgerows to connect land parcels.
Meet the panel from the Alternative Land Uses biodiversity net gain event
This biodiversity net gain event was part of a series of Farmers Weekly events: Alternative Land Uses.
You can register for the next event and find out more on the Alternative Land Uses website.
Neil Berry, chartered tax adviser, MHA
With more than than 25 years’ experience, Neil advises farmers, landowners, private individuals and companies on capital and income tax planning. He also has extensive VAT, international and financial product experience.
Harvey Davies, solicitor, Thrings
Part of the agriculture team at Thrings, Harvey also owns and manages a farm in Herefordshire. Advising agricultural clients on planning and environmental challenges, he has developed particular expertise in natural capital markets, including BNG.
Tom Mason, head of land (south), Environment Bank
Tom’s work includes bringing on board BNG land, negotiating commercial agreements and facilitating the delivery of projects. He has worked with farmers as a land agent and also at the Country Land and Business Association.
Tom Rothero, associate director, Environment Bank
With 13 years’ commercial and ecology experience, Tom oversees the national ecology team. He has been key in establishing a network of large-scale nature recovery projects, delivering BNG in advance of the mandatory planning requirement.
Alexander Ward, owner, Cornwell Manor
Conservation and habitat work has a long history on the 809ha mixed estate, with several projects under way on adjoining land before Alexander signed up with Environment Bank on 33.5ha. Most of the estate is in higher level Countryside Stewardship.
From Environment Bank
Environment Bank offers low-risk access to BNG income.
We’re co-creating agricultural habitat banks with landowners – removing all long-term liability for BNG delivery, covering all capital costs, providing secure tax-efficient annual payments from day one, protecting landowners from price fluctuations and sharing windfall profits.
Find out more at environmentbank.com
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Author: Suzie Horne