Tax Planning
Understanding Tax on Ecosystem Services: Opportunities for Landowners and Developers
New HMRC guidance shows how payments for ecosystem services—for instance biodiversity credits or carbon sequestration—are taxed across income, VAT, capital gains, and more. This is vital for landowners and developers.
By NomadicTax Research Team • 5-8 min read • June 7, 2026
## What are Ecosystem Services?
Ecosystem services are contracts or payments for ecological benefits, such as **biodiversity net gain**, **nutrient credits**, **woodland carbon projects**, or **peatland restoration**. Both mandatory schemes (e.g. developer obligations) and voluntary schemes may generate income streams. ([gov.uk](https://www.gov.uk/government/publications/ecosystem-services-technical-note/technical-note-on-ecosystem-services?utm_source=openai))
## Key Tax Implications under HMRC’s Technical Note (14 May 2026)
| Aspect | Key Point for Landowners/Developers |
|---|---|
| **Income vs Capital** | Payments are **typically income**, especially if part of ongoing trade or property business. Capital receipts may apply only in rare cases of permanent land sterilisation or loss of use. ([gov.uk](https://www.gov.uk/government/publications/ecosystem-services-technical-note/technical-note-on-ecosystem-services?utm_source=openai)) |
| **Type of tax liabilities** | Can affect **Income Tax**, **Corporation Tax**, **Capital Gains Tax**, **VAT**, **Stamp Duty Land Tax (SDLT)**, and **Inheritance Tax** depending on scheme and ownership. ([gov.uk](https://www.gov.uk/government/publications/ecosystem-services-technical-note/technical-note-on-ecosystem-services?utm_source=openai)) |
| **Expenditure & Deductions** | Costs for establishing or maintaining ecosystem services may be deductible if incurred in trade or property business. Capital allowances may apply for plant/machinery. Expenditure that is disallowed against income might still reduce gains in CGT when disposing land. ([gov.uk](https://www.gov.uk/government/publications/ecosystem-services-technical-note/technical-note-on-ecosystem-services?utm_source=openai)) |
| **Duration and contractual terms** | Length and nature of the commitment (e.g. how long land must be managed) matter for determining treatment. If ongoing trade, then revenue; permanent changes favor capital treatment. ([gov.uk](https://www.gov.uk/government/publications/ecosystem-services-technical-note/technical-note-on-ecosystem-services?utm_source=openai)) |
## Practical Considerations & Examples
**Example 1: Woodland Carbon Scheme**
Alice owns woodland marketed under the Woodland Carbon Code. She receives payments selling carbon credits. Since woodland is commercially occupied, most payments will be **income of a trade** and subject to Income Tax or Corporation Tax. However, when she eventually sells land, those transactions may trigger **Capital Gains Tax**. Costs for planting and maintenance may be deductible or eligible for capital allowances. ([gov.uk](https://www.gov.uk/government/publications/ecosystem-services-technical-note/technical-note-on-ecosystem-services?utm_source=openai))
**Example 2: Developer Biodiversity Net Gain**
Bob, a property developer, must secure biodiversity credits and pays a third party landowner to generate them. Payments Bob makes are likely **business expenses** and deductible for his tax. For the landowner, payments may be treated as income or part of property business. The contractual structure (interest in land, lease arrangements) could affect whether SDLT is triggered. ([gov.uk](https://www.gov.uk/government/publications/ecosystem-services-technical-note/technical-note-on-ecosystem-services?utm_source=openai))
## Strategies to Plan Well
- **Draft clear contracts**: specifying duration, responsibilities, transfer of rights or interests in land to ensure predictable tax treatment.
- **Record-keeping**: track payments received and expenses incurred, lease terms, maintenance obligations—evidence is vital.
- **Check trade classification**: whether you are a business of farming, property letting, or trading will affect reliefs and allowable deductions.
- **VAT registration and impact**: if you reach turnover thresholds or are already VAT registered, ensure credit/charge treatment is accounted for.
- **Inheritance and estate planning**: environmental management agreements (e.g. under section 124C IHTA 1984) may preserve exemptions under certain IHT rules; consult early. ([gov.uk](https://www.gov.uk/government/publications/ecosystem-services-technical-note/technical-note-on-ecosystem-services?utm_source=openai))
## Benefits and Risks
**Benefits**:
- New income streams for landowners from voluntary schemes or obligations.
- Potential tax efficiency if structured properly for trade and capital reliefs.
**Risks**:
- Misclassified receipts or costs leading to unexpected tax (or penalties).
- Underestimating the administrative burden.
- SDLT or other taxes triggered by land agreements if defined poorly.
**Takeaway:** Payments for ecosystem services offer growing opportunities—but tax treatment depends heavily on facts, contracts, and the nature of land use. Know the rules and get advice to avoid surprises.