Tax Planning
Utilising Ecosystem Services Payments: Tax Planning for UK Landowners and Developers
New HMRC guidance clarifies how payments for biodiversity, carbon, and nutrient credits are taxed — ideal for landowners or developers seeking efficient planning strategies.
By NomadicTax Research Team • 5-8 min read • June 15, 2026
## What are Ecosystem Services Payments?
The UK government has released technical guidance (14 May 2026) on **ecosystem services** — payments to landowners or farmers for activities like biodiversity net gain, woodland or peat restoration, nutrient credits, and carbon sequestration. These payments often come from developers or government projects needing to offset environmental damage. ([gov.uk](https://www.gov.uk/government/publications/ecosystem-services-technical-note?utm_source=openai))
## Tax implications: income, capital, VAT & inheritance
Payments can fall under multiple tax regimes depending on their nature:
- **Income Tax / Corporation Tax**: regular payments for ongoing service provision (e.g. carbon credits) tend to be income once received.
- **Capital Gains / Stamp Duty Land Tax / Inheritance Tax**: If you sell land, or there’s a one-off capital receipt (e.g. sale of rights), rules may treat those gains differently.
- **VAT**: If ecosystem services are considered supplies of services or goods, VAT registration and output tax may apply.
The guidance explains whether receipts are revenue or capital, how expenditure is treated, and when payments are taxable or exempt. ([gov.uk](https://www.gov.uk/government/publications/ecosystem-services-technical-note/technical-note-on-ecosystem-services?utm_source=openai))
## Planning strategies for landowners and developers
### For landowners
- **Track and differentiate payments**: Many projects may combine regulated and voluntary payments. Know which part is “required” versus “voluntary” — the tax treatment may differ.
- **Allocate costs properly**: Expenditures to deliver ecosystem services (e.g. planting peatland, woodland maintenance) may be deductible in income or against gains, depending on their nature and timing.
### For developers
- **Biodiversity net gain obligations**: When paying landowners to deliver net gain or purchasing credits, understand whether payments are deductible as construction or capital costs.
- **Structuring contracts**: Contracts specifying which activities are being compensated help distinguish tax treatment. For example, payments for ‘setting up woodland’ may be capital expenditure; ongoing maintenance is income expense.
## Example scenario
**Bob** owns farmland. A property developer wants offsite biodiversity net gain, offering £100,000 over 5 years to plant hedgerows and maintain them.
- Year 1: Bob incurs £30,000 planting costs (capital-like);
- Years 2-5: maintenance, hedge pruning, etc. (ongoing income-like).
Bob should allocate only recurring maintenance expenses fully against income, and consider whether the initial plantings might qualify for certain reliefs or be treated as capital expenditure (affecting CGT or IHT).
## Actionable steps
1. Consult the HMRC ecosystem services technical note to map payments and obligations to actual or expected tax categories.
2. Maintain clear invoices/contracts identifying each payment’s purpose.
3. Use separate accounting lines for ‘setup’ costs vs ‘maintenance’ expenses.
4. Check eligibility for reliefs, especially for woodland (Woodland Carbon Code) and peatland.
5. Review VAT registration status: if your supply of these services is regular and large, VAT output or deduction rules may apply.
## Benefits of Proper Planning
- Maximised tax deductions or reliefs, preserving cash flow.
- Reduced risk of HMRC challenge — clarity in categorisation will satisfy audits.
- Possible more favourable treatment for capital receipts (e.g. sale of rights), inheritance/tax planning.
### In summary
Ecosystem services payments are becoming more common and more regulated. The latest guidance gives landowners and developers tools to plan tax-efficiently. If you’re entering contracts or delivering environmental projects, be systematic — define the nature of payment, maintain separate records, and seek professional advice where needed.