Policy paper

Technical note on ecosystem services

Published 14 May 2026

This note gives HMRC’s view on the taxation of various aspects of a range of payments made to landowners for providing ‘ecosystem services’. Ecosystem services is a broad term used to cover contracts for the provision of ecological benefits: for example, improvements to water quality, increases in biodiversity, and carbon capture.

This note covers in detail payments relating to statutory or government-backed schemes, but also sets out the general principles that HMRC will apply when looking at similar non-statutory arrangements.

Introduction

There are 2 statutory ecosystems services which apply in England only:

• biodiversity net gain
• nutrient neutrality

In addition, there are 2 government-backed voluntary schemes available across the UK:

• the Woodland Carbon Code
• the Peatland Code

This note provides HMRC guidance on the tax treatment of these schemes and similar voluntary arrangements from the points of view of:

• the person paying for or buying the ecosystem service
• the landowner creating the service

Background to biodiversity net gain

Biodiversity net gain (BNG) is an approach to development which ensures that habitats for wildlife are left in a measurably better state than they were before the development.

n England, BNG is mandatory under Schedule 7A of the Town and Country Planning Act 1990 (as inserted by Schedule 14 of the Environment Act 2021). This requires that developers must deliver a BNG of 10%. This means a development will result in more, or better quality, natural habitat than there was before development.

There are 3 ways a developer can achieve BNG of 10%:

• they can create biodiversity on-site (within the red line boundary of a development site)

• if developers cannot achieve all of their BNG on-site, they can deliver through a mixture of on-site and off-site gains. Developers can either make off-site biodiversity gains on their own land outside the development site or buy off-site biodiversity units (BNG Units) on the market

• if developers cannot achieve on-site or off-site BNG, they must buy statutory biodiversity credits (BNG Credits) from the government. This should be a last resort. The government will use the revenue to invest in habitat creation in England

BNG Units which meet the statutory requirements must be secured for a period of at least 30 years and are overseen either by a local authority or by a responsible body approved by Defra. BNG Units can be created either through section 106 agreements or through standalone conservation covenants. BNG Units are validated before being entered on the national BNG register operated by Natural England.

The statutory (official) biodiversity metric is the way of measuring biodiversity value for the purposes of BNG.

Background to nutrient neutrality

Statutory nutrient mitigation applies in England. It applies to river catchments in unfavourable condition due to nutrient pollution (excess nitrogen, phosphorus, or both). Projects and plans may only go ahead if the new homes and other overnight accommodation will not cause additional pollution, referred to as nutrient neutrality. See the Natural England report on Nutrient Neutrality Principles for details.

Habitat sites are legally protected under The Conservation of Habitats and Species Regulations 2017 (the Habitats Regulations), as amended by the Levelling-up and Regeneration Act 2023.

Natural England, in its statutory role, provides advice to competent authorities including local planning authorities (LPAs) in assessing the impacts of new developments on protected sites through the Habitats Regulations Assessment (HRA) process. Nutrient neutrality enables decision-makers to assess and quantify mitigation requirements of new developments to ensure additional nutrients from development can be counterbalanced, with no net increase in nutrients within the affected habitat sites.

Developers can do the following to meet nutrient neutrality:

• build mitigation into their plans onsite

• work with landowners or others to arrange for mitigation offsite

• purchase nutrient credits from a nutrient mitigation scheme within the same water catchment where action has been taken to secure pollution reductions of nitrogen and / or phosphorus to create credits. Schemes may be managed by a local authority, Natural England (such as the Nutrient Mitigation Scheme in Tees and Poole Harbour catchments) or third party/private market providers, and these schemes will form arrangements with landowners and others for mitigation

Nutrient Mitigation schemes will be changed on implementation of the Planning and Infrastructure Act 2025.

Nutrient credits

Nutrient credits can be created by reducing or capturing nutrients that would otherwise end up in protected sites, either by changing land use or by making interventions such as drainage and sewerage improvements. Credits must be in the same catchment and must address pollution upstream of the protected site that would be affected by the development. Credits provide an equal nutrient reduction benefit by mitigating the pollution risk of the new development that directly impacts the protected site.

One nutrient credit accounts for the mitigation of either 1kg of Total Nitrogen (TN) or 1kg of Total Phosphorus (TP). Natural England provides guidance on how this can be calculated, including providing nutrient neutrality. Developers can use their own calculation as long as it is accepted by the LPA. Verification of credits is conducted by third parties.

Nutrient credits are intended to mitigate the development they have been allocated to and are not tradeable by the purchaser in the way that, for example, carbon credits are.

Payments to landowners for nutrient mitigation will require one or more effective mitigations approved by a competent authority.

Landowners generating nutrient credits will need to enter into binding agreements for the future management of the land. In many cases these will be very long-term agreements, following Natural England advice that the mitigation should be in place for the life of the development. Usually this means at least 75 years, but in some cases the mitigation may be for a much shorter time period, for example, where an interim mitigation is required pending a planned upgrade of wastewater treatment works.

Natural England guidance sets out examples of mitigation activities which can be effective. These include:

• creation or restoration of new semi-natural habitats

• creating treatment wetlands for runoff, diverted river water or wastewater

• retrofitting sustainable urban drainage systems

• replacing septic tanks with package treatment plants

• provision of new wastewater treatment facilities

• short-term temporary agricultural management measures

Other mitigation measures that have been considered effective include closure of fish farms, constructed wetlands and riparian buffers.

Background to the Woodland Carbon Code and the Peatland Code

The Woodland Carbon Code and the Peatland Code are voluntary schemes providing a quality assurance standard for woodland and peatland carbon projects. The carbon credits that are relevant to this note are for woodland and peatland carbon credits.

Landowners develop either woodland or peatland carbon projects, which are validated by an accredited body and registered on the UK Land Carbon Registry. At this stage landowners are entitled to Pending Issuance Units (PIUs) which are listed on the registry. PIUs themselves cannot be used to offset carbon emissions.

Once the project has been verified, usually 5 years after the start of the project, PIUs are converted to Woodland Carbon Units (WCUs) or Peatland Carbon Units (PCUs) accordingly. WCUs represent a tonne of CO2e (carbon dioxide equivalent) removed from the atmosphere and locked into growing trees (sequestered), while PCUs represent a tonne of CO2e prevented from being emitted from peatland as a result of restoration.

Information for landowners about the Woodland Carbon Code  and Peatland Code is available.

PIUs, WCUs and PCUs can be sold on the open market and are together generally referred to as ‘carbon credits’. The buyers will often be entities with regulatory or other requirements to offset carbon emitted in the course of their business. Alternatively, buyers may be trading in carbon credits or may be acquiring them for philanthropic purposes.

Buyers of fully verified carbon credits will normally retire (or cancel) the carbon credit when purchased as part of the offsetting or philanthropic activity. Buyers of PIUs must wait until they have been verified as WCUs or PCUs before they can be used to offset carbon emissions and then retired.

Other types of land-based carbon schemes are in development and similar principles will apply to those as set out in this note.

Stacking

Defra guidance confirms that using the same land for different ecosystem services is possible. Where 2 types of credits or units are generated on the same piece of land this is known as ‘stacking’, stacking is when multiple credits or units from different nature markets are sold separately from the same activity on a piece of land. However, not all credits and units are suitable to be stacked, as this risks double-counting of the same environmental gain or the same financial gain. Whether or not stacking has occurred and is permitted depends on the design of each project.

For example, it is usually possible to stack nutrient credits and biodiversity units: reduction in use of fertilizers and planting grasses are 2 different activities on the same piece of land that could be funded separately and would result in the reduction of nutrient runoff into local watercourses and an increase in biodiversity.

Similarly, nutrient credits and WCUs could be stacked. For example, cessation in fertilizer use would result in a measurable reduction in nutrient run-off into local watercourses, and planting of trees would sequester carbon. These activities could be paid for separately, with 2 different outcomes delivered on the same piece of land.

Where a landowner receives payments for stacking then the tax treatment for each type of credit or unit may differ.

Payments by property developers and others for ecosystem services

Income and corporation tax treatment of payments by property developers for BNG Units or nutrient credits

Where a property developer, who is conducting the trade of property development, is required by an LPA or other competent authority to incur expenditure to ensure BNG or to achieve nutrient neutrality, whether on-site or off-site, it will generally be allowable expenditure for income and corporation tax purposes, subject to the usual rules around deductibility of expenditure.

Where the land is not held on trading account, expenditure will not ordinarily be an allowable expense against income because it is capital expenditure related to the cost of planning permission under normal principles. Where expenditure is capital, it may be allowable in computing any capital gain or loss on the disposal of the property. When computing any capital gain or loss on the disposal of the property, capital expenditure may be deducted where it falls into the categories defined in section 38 TCGA 1992. See the Capital Gains Manual at CG15150 for further details.

If a developer retains an interest in the land for the purposes of their development activity — for example, they may lease the land to a tenant who is responsible for creating BNG Units or nutrient credits — then the interest retained should continue to be dealt with as trading stock. See the Business Income Manual at BIM51535 and BIM51540.

Tax deductibility of purchase of carbon credits

The end user of carbon credits may be an entity requiring credits to offset carbon emissions, for example an industrial concern or airline. The end user will therefore retire the carbon credits and they will cease to exist. Where the end user is trading, expenditure on the cost of carbon credits for the purposes of the trade will ordinarily be an allowable deduction in computing profits of the trade.

If carbon credits brought for the purposes of trade are sold before being retired, the sale receipts should be brought into account for tax purposes as income of the trade.

Intermediaries who carry on a trade in carbon credits may acquire carbon credits or rights to carbon credits. The credits or rights will then be held as trading stock. Taxation will follow normal principles for trading.

A person or entity may acquire carbon credits or rights to carbon credits as a long-term investment, or for another reason, without the intention of trading. In these circumstances the carbon credits or rights will be assets and their disposal or transfer could be a chargeable occasion for the purposes of capital gains tax or corporation tax on chargeable gains, subject to the normal rules.

Carbon credits may be accounted for as intangible assets. If a company accounts for carbon credits in accordance with generally accepted accounting practice (GAAP) as intangible assets, it is unlikely they will fall within the special regime for the taxation of intangibles provided by Part 8 CTA 2009 unless they meet the definition of an intangible fixed asset. See guidance at CIRD11170.

Tax treatment of payments made for credits or units which are not required for regulatory purposes

Sometimes a payment for credits or units will not be made pursuant to a legal obligation such as a planning obligation or regulatory requirement. The tax deductibility of a payment which is not a legal requirement will depend on whether it is wholly and exclusively for the purposes of the trade. See guidance at BIM37510 about expenditure for general philanthropic purposes.

Income

Considerations for the landowner

Receipts of income from the provision of ecosystem services

Receipts for ecosystem services will be taxable in the hands of the landowner. The exact nature of taxation will depend on the facts but will normally be taxable as income of a trade.

Where the receipts are part of an existing trade, the facts of the case will ordinarily indicate that they are receipts of the trade for income tax and corporation tax purposes. See BIM80530 for the general principles around activities constituting more than one trade.

Where the receipts relate to a property business, they will be receipts of that property business. This may arise where a lease provides for additional payments to the landlord to become due when the tenant receives income from providing ecosystem services.

Farming

Section 996 Income Tax Act 2007 defines farming. Section 9(1) Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005) provides that farming or market gardening in the United Kingdom is treated for income tax purposes as the carrying on of a trade or part of a trade (whether or not the land is managed on a commercial basis and with a view to the realisation of profits).

Section 9(2) ITTOIA 2005 provides that all farming in the United Kingdom carried on by a person, other than farming carried on as part of another trade, is treated for income tax purposes as one trade.

Section 36 Corporation Tax Act 2009 (CTA 2009) provides equivalent rules for the purposes of corporation tax.

HMRC guidance on farming can be found at BIM55000 onwards.

Where a landowner in receipt of payments for ecosystems services has a farming trade on land which includes the land on which the units or credits were created:

• if the land continues to be farmed, the receipts will form part of the farming trade

• if the land is no longer farmed, the receipts are likely to form part of the farming trade if the amount of land no longer farmed is not a substantial part of the land on which the farming trade is carried on

The tax rules that apply to farming (such as averaging) will apply to farming trades which include income from the provision of ecosystem services. See BIM55000.

Commercial occupation of land other than woodlands

Section 10 ITTOIA 2005 provides that the commercial occupation of land in the United Kingdom is treated for income tax purposes as the carrying on of a trade or part of a trade. Section 38 CTA 2009 provides equivalent rules to section 10 ITTOIA 2005 for the purposes of corporation tax.

If the land is not otherwise used for a trade, of which the ecosystem services are part, then the income from ecosystem services will be treated as trading income. This is also likely to be the case if nutrient credits are obtained for drainage or sewage improvements.

Where land is held but is not part of a property business or existing trade, and is not a woodland within section 11 ITTOIA 2005 (or section 37 CTA 2009), and the land is exploited for the sale of ecosystem services, this is commercial occupation of land within section 10 ITTOIA 2005 (or section 38 CTA 2009) and the income will be taxed as income of a trade.

Commercial occupation of woodlands

Section 11 ITTOIA 2005 provides that the commercial occupation of woodlands in the United Kingdom is not a trade or part of a trade for any income tax purpose. This applies where woodlands are managed on a commercial basis and for realisation of a profit.

Where woodlands are occupied commercially, income and expenditure relating to units or credits created on the land on which the woodland is situated does not form part of a trade and does not create a trade. Expenditure incurred to create ecosystem services in a woodland that falls within the conditions of section 11 ITTOIA 2005 will not be allowable. Guidance on woodlands is at BIM 67701.

For sales subject to capital gains tax, the woodland exemption applies to the ‘consideration for the disposal of trees standing or felled or cut on woodlands’ see CG73200. Where consideration is attributable to any other asset not covered by the exemption (such as the land itself or PIU/WCUs included in the sale), a just and reasonable apportionment would be required to identify the consideration attributable to the exempt and non-exempt elements of the transaction.

Where the creation of units or credits leads to the woodland no longer being a woodland occupied commercially for the purposes of section 11 the woodlands exemption will no longer apply.

Note that there is no equivalent exemption from income tax for peatland. This means that the income from the sale of PIUs or PCUs relating to peatland will either be part of an existing trade or deemed to be a trade because of commercial occupation of land under section 10 ITTOIA 2005.

Where a woodland is occupied commercially but is leased to a tenant, payments made by the tenant to the landlord will be income of the property business.

Whether receipts are capital or revenue

Payments for ecosystem services will normally be income payments and income of a trade as set out above. However, in cases where it is argued that the receipt is capital, the facts and evidence should be carefully examined. An example of a capital receipt is where payments are for compensation for loss of use of the land and permanent sterilisation of the asset. See BIM35600 for guidance about the treatment of compensation payments for sterilising an asset.

The length of time for which the ecosystem service must be maintained is a factor to be considered in deciding whether payment is a receipt of income or capital in the hands of the landowner, but does not on its own decide the matter for tax purposes. Consideration should be given to the activities undertaken on the land to maintain the service and whether or not the land has other ongoing trading use, such as if it continues to be used as a farm and the maintenance of the ecosystem service is part of the farming activities. For example, if a nutrient credit is generated through drainage improvement on a farm, which continues operating as a farm, the receipts will be trading receipts of the farm even though the duration of the commitments can exceed 75 years.

If, exceptionally, the receipt is not part of a trade or property business and is a capital receipt, then the normal rules for computation of capital gains will apply. Expenditure on the part disposal may also be allowable as explained at CG12731.

When receipts should be recognised for tax purposes

If the landowner is using the cash basis

If the cash basis is used, then the receipts should be brought into account when received. Cash basis is only available to unincorporated businesses. See BIM70000 for guidance on the cash basis.

If the landowner is using accruals basis

The accruals basis is required by GAAP (see BIM31000). The profits of a trade must be calculated using GAAP by all limited companies (section 46 CTA 2009) and limited liability partnerships (section 25 ITTOIA 2005) and can be used by the self-employed and partnerships.

Where the accruals basis is used, the income relating to ecosystem services should be accounted for in accordance with GAAP. Depending on the individual facts and circumstances, GAAP may require the income to be recognised upfront and/or to be spread over the life of the agreement.

Payments received by a landowner from an intermediary

Where the ecosystem services agreement is between a developer and an intermediary (such as a habitat bank), payments made to the landowner by the intermediary will be taxable as income unless the land is a woodland.

The nature of these payments for tax purposes will depend on the exact arrangements that are put in place. If the intermediary takes an interest in land and makes payments as if they are rent, they will be income of a property business and not part of the farm or other trade.

Where the intermediary does not acquire an interest in land, the payments will be part of the trade.

Where the landowner receives payment from the intermediary for the provision of land management, this will be trading income as part of an existing trade or as commercial occupation of land under section 10 ITTOIA 2005 or section 38 CTA 2009.

Where the land is commercially exploited woodlands (see section 11 ITTOIA 2005 and section 38 CTA 2009) and the intermediary does not take an interest in land, the payments to the landowner will be treated as relating to the commercial occupation of the woodlands and not taxable as income. Where the intermediary does take an interest in land income paid in the form of rent will be taxable as income of a property business.

Expenditure

Expenditure by the landowner to secure ecosystem services

In establishing ecosystem services, landowners will incur expenditure of various kinds. These can include, for example, payments for improving and adapting the land, taking professional advice from ecologists and others, and legal matters in securing the registration of the unit either through a section 106 agreement or by creating a conservation covenant with a responsible body.

The tax treatment of this expenditure will depend on what the person incurring the expenditure is using the land for. If it is being held for trade, for example as a farm, it is likely that, subject to the usual rules on allowability of expenditure, it will be allowable against the taxable income of the farming trade.

It is possible that a landowner who holds land in a property business will incur expenditure creating BNG Units. For example, if a contract is entered into by a tenant to provide BNG Units, some of the required expenditure may fall to the landlord under the terms of the lease. In these circumstances, that expenditure may be allowed against the income of the property business subject to the ordinary rules on allowability. The normal rules for taxation of property income will apply, including taxation of premiums and reverse premiums if relevant.

Where the expenditure is not allowable against income it may be allowable in computing any capital gain or loss on the disposal of the property. See CG15150P for further details.

Capital allowances may be available for capital expenditure incurred for the provision of plant or machinery, subject to the normal rules on expenditure. This is likely to be most relevant in the case of installation of package treatment plants to replace septic tanks. Whether capital allowances are allowed for drainage will depend on whether the expenditure is on qualifying plant or machinery, or on alterations to the land which would not be allowable.

Other tax issues

Charitable exemption

Where the landowner is a charity, activities to create ecosystem services and income arising from those activities will benefit from the exemption on profits of a charitable trade so long as the activities falls within the primary purpose of the charity based on its charitable objects. If for example the charitable purpose includes the preservation of land it is likely that the ecosystem activities will be within that purpose.

Tax implications of stacking

See above for background about stacking. Receipts and expenditure for each activity included in the stacking should be considered separately.

Capital gains considerations on the sale of land which is subject to a conservation covenant or section 106 agreement to deliver ecosystem services

Where land which is held as a capital asset and is providing ecosystem services is sold, sale proceeds may be subject to capital gains tax (CGT) or corporation tax (CT) on chargeable gains.

The disposal may meet the conditions for certain capital gains reliefs subject to the normal rules for each relief, see CG60201C. For example, business assets rollover relief, see rules at CG60270 and gifts of business assets holdover relief, see CG66884.

VAT

BNG Units meet the principles set out in VATSC06584. They are tradeable instruments that represent an offset of biodiversity losses and a 10% gain in biodiversity compared to the pre-development state. There are safeguards built into the scheme through the planning permission process and legal agreements. Depending on the type of agreement, either the Local Planning Authorities or the designated responsible bodies enforce the projects and ensure that they deliver the required Units.

Therefore, where these Units are supplied by a taxable person in the UK, they are subject to VAT at the standard rate.

Sales of statutory BNG Credits are outside the scope of VAT as they are sold under a special legal regime and there is no distortion of competition (see VATGPB3200).

VAT and carbon credits

HMRC VAT guidance includes a section about carbon offsetting, see VATSC06580. Most compliance market credits and voluntary carbon credits are in scope if they meet the principles set out in this guidance but are outside the scope of VAT if they are activities in these categories:

• the first issue of a voluntary carbon credit by a public authority

• the holding of voluntary carbon credits as an investment, where there is no economic activity

• donations made to voluntary carbon credit projects

• sales of voluntary carbon credits from self-assessed projects with no independent or third-party verification

Stamp Duty Land Tax

The SDLT treatment of payments by a developer for ecosystems services will depend on the exact nature of the transaction. Payments by developers for ecosystem services do not fall within the definition of a chargeable interest within section 48 FA 2003 and as such are not chargeable to SDLT.

Where land is acquired or conservation covenants created to deliver the services, SDLT will apply to consideration paid for the land transaction within section 43 FA 2003.

Inheritance tax

Legislation in section 61 FA 2025 (which was inserted by section 124C IHTA 1984) deals with agricultural relief from IHT for land subject to an environmental management agreement, which will include the ecosystem services covered in this note. It applies to deaths and other transfers of value, including lifetime gifts and charges on relevant property trusts, on or after 6 April 2025. Guidance is at IHTM24300.

While each case is ultimately determined on its own facts, the creation of an environmental management agreement within section 124C IHTA 1984 should not in itself prevent land qualifying as conditionally exempt.