AU T UM N 2026
Agricultural Focus
INSIDE • Natural Capital • Agricultural Property Relief (APR) on farmhouses
• Farming trade losses: Navigating the five-year rule and extended relief claims • Staff Retention: What are your options? • Meet the team: Will Leonard
01 | Natural Capital
Natural Capital Introduction
Nutrient Neutrality
The summer heatwave in the UK has highlighted the increasing importance of environmental management and climate resilience. As governments and businesses seek to meet environmental targets, opportunities continue to emerge for landowners to generate income from natural capital schemes.
Construction of overnight accommodation in certain river catchments in England may only proceed if it will not cause additional nutrient pollution (excess nitrogen, phosphorous or both entering the waterways). Landowners can create nutrient credits by changing land use or by improving drainage and sewerage, then sell these to developers operating within the same catchment to help them achieve this.
After a period of uncertainty, HM Revenue & Customs (HMRC) have now produced guidance on the tax treatment of natural capital units and credits. Whilst the guidance is not definitive, and is inevitably HMRC’s view of matters rather than the law, this has provided some most welcome clarity. Listed below are the four most common types, together with their tax treatments.
Biodiversity Net Gain (BNG) Credits In England, land developers must deliver a biodiversity net gain of 10% when developing land. One of the ways they can do this is by buying BNG credits from landowners. BNG credits must be secured for at least 30 years, so the land used to create the credits is tied up for a significant period.
The scheme will be changed on the implementation of the Planning and Infrastructure Act 2025.
Woodland Carbon Code Credits and Peatland Code Credits Landowners can develop projects which create carbon credits. Subject to accreditation, these can be sold on the open market to businesses required or wishing to offset carbon they emit, or other entities wishing to buy them for philanthropic purposes.
Stacking Stacking is where two or more types of credits are created on the same piece of land. This only applies where the same environmental gain is not double counted.
Tax Treatment for the landowner The information below is intended as a high-level summary only, and you should always take advice from a suitably qualified individual. The tax treatment will depend on the specific facts and circumstances of each project, including how the land is used, ownership structure and the contractual arrangements put in place. Credit type
Biodiversity Net Gain Credits
Nutrient Credits
Peatland Code
Woodland Carbon Code
Area
England only
Certain areas of England only
UK
UK
Income tax
Normally taxed as trading income
Corporation tax
Normally taxed as trading income
VAT
Subject to VAT
Capital gains tax
Exceptionally, credits may be treated as capital disposals, in which case they follow the normal rules. Disposals of land are taxable as normal. Business reliefs such as holdover and rollover may apply.
Inheritance tax
Agricultural Property Relief (APR) can apply to land subject to an environmental agreement. The land may also qualify for Business Property Relief (BPR) subject to the normal criteria.
SDLT
Payments for ecosystem services are not assessable to SDLT. If land is acquired, leases granted, or covenants created, SDLT will apply.
Likely subject to VAT
Income from a commercial woodland is exempt Usually subject to VAT, but certain exemptions apply
Natural Capital | 02
Accounting recognition of receipts If the landowner uses the cash basis, the receipt should be brought into account when received. Otherwise, the GAAP (Generally Accepted Accounting Practice) rules should be used. These may result in the receipt being fully declared immediately or spread over the life of the agreement.
Capital vs Income Treatment In general, the tax treatment of natural capital receipts should follow the accounting treatment. HMRC’s view is that receipts are normally income payments from a trade. A large upfront payment may be capital, as this is arguably compensation for the impairment of the land, or loss of use. The length of time for which the ecosystem service is maintained is relevant, although not conclusive. Capital receipts will benefit from the lower capital gains tax rates of 24%, rather than being assessed to income tax at up to 45% (60% effective rate if it pushes the taxpayer’s income over £100,000). However, there are benefits to spreading an upfront receipt over the life of the agreement as income: Any expenditure incurred each year in maintaining the scheme can be offset against the apportioned income. If the payment is taxed as a single, upfront capital receipt, no tax relief will be available on subsequent expenditure. Part of the tax liability is deferred, as only a proportion of the receipt is assessable each year rather than everything being taxed in the first year. Reporting income annually supports the argument that the business is trading, which is important for various tax purposes, including the offsetting of losses and Balfour planning for inheritance tax purposes.
Landowner’s expenditure If land is held for trading purposes, expenditure incurred in setting up and maintaining the scheme will usually be an allowable deduction for tax purposes, subject to the normal rules.
If land is held within a property business, expenditure will be allowable against the income of the property business, again subject to the normal rules. Capital allowances may be available on plant and machinery.
Practical considerations The land must be maintained for a minimum period: 30 years for BNG Units; potentially 75 years or more for Nutrient Credits. Before entering into a natural capital agreement, landowners should therefore consider: I mpact on land values. We have heard mixed views from valuers as to whether they will fall or rise. Financing and borrowing implications. A reduction in land value/the presence of the scheme generally may reduce the maximum amount and availability of secured borrowing. Exit options and obligations on a future sale. Any purchaser will inherit the responsibility of complying with the scheme. Impact on future farming or development opportunities. Succession and inheritance planning considerations, and the impact on future generations. The landowner’s need for units. If farmer is required to sequester carbon as part of an agreement to sell produce to a supermarket, they may have to buy units from the market at an increased cost if they have sold all their own.
Conclusion Natural capital schemes can provide landowners with an attractive additional income stream while contributing to wider environmental goals. However, the long-term commitments involved, coupled with evolving tax and regulatory treatments, mean that careful planning and professional advice are essential before entering into any arrangement.
03 | Agricultural Property Relief (APR) on farmhouses
Agricultural Property Relief (APR) on farmhouses - time to get your farmhouse in order! In recent years, HMRC appear to have taken a more robust approach to reviewing APR claims for farmhouses, particularly where the dwelling is of high-value, or the farming activity is relatively modest.
Whilst each case will be considered on its own facts, there are a number of practical steps that can help demonstrate that a farmhouse is occupied for the purposes of agriculture. Examples include:
Following the changes announced in the Autumn Budget 2024, individuals are entitled to 100% inheritance tax (IHT) relief on qualifying agricultural and business property with a combined value of up to £2.5m. Qualifying property in excess of this threshold is subject to relief at 50%.
Holding regular farm management meetings at the farmhouse and retaining clear meeting minutes evidencing the location. This should include meetings with external advisers such as land agents, agronomists, and other professionals.
APR will only be available on the agricultural value of the farmhouse; this can often be lower than the full market value.
Maintaining a dedicated farm office within the farmhouse from which the administrative and management functions of the farming business are carried out. Where a farm office is operational, photographic evidence will help substantiate a claim.
For a farmhouse to qualify for APR, the property must (1), be occupied for the purposes of agriculture for at least two years prior to the event and, (2), it must be character appropriate to the farming activities that are taking place. 1. Farmhouse is not defined in legislation, but decisions laid out in tax cases set some principles to follow: The farmer of the land is the person who farms the land on a day-to-day basis; The farmhouse is the chief dwelling-house to a farm in which the farmer lives; and The day-to-day activities of the farm are run from the farmhouse. 2. The character appropriate test is subjective and HMRC have published guidance on the main factors to consider which include: Whether the farmhouse is appropriate by reference to its size and layout with the farm buildings and agricultural land. Whether the farmhouse is situated as an integral part of the farming operation rather than being separate from it. Whether a reasonable and informed person would regard the property simply as a house with land, or as a farmhouse.
Ensuring the farmhouse is used as the principal correspondence address for the farming business, including with HMRC and other regulatory bodies. Keeping farm business records at the farmhouse including livestock records, cropping plans, invoices, and other management documentation. Where contractors undertake farming operations, retaining evidence that the occupier remains responsible for key management and husbandry decisions, and actively supervises the farming activities. In summary, taking simple steps such as those outlined above can strengthen a claim for APR on a farmhouse and potentially result in a significant IHT saving. As HMRC will consider the circumstances existing in the two years prior to the event, it is important, to regularly review what is happening on the ground, and to ensure the farmhouse continues to be central to the farming activities.
Farming trade losses: navigating the five-year rule and extended relief claims | 04
Farming trade losses: Navigating the five-year rule and extended relief claims A fundamental condition of claiming sideways loss relief is that the farming business must be conducted on a commercial basis, with a realistic view to making profits. Provided this requirement is met, it is possible to offset the loss against other income. Generally, where losses (before capital allowances) continue beyond five consecutive years, the loss can only be carried forward to set against future profits from the farming trade. In limited circumstances, it is possible to claim losses over an extended period; however, HMRC are very likely to challenge the claim, and the burden of proof is on the taxpayer. To make a successful claim, the following tests must be met: The trade must be conducted on a commercial basis with a genuine expectation to profit. A competent farmer, looking ahead at the start of the loss-making period, would reasonably expect profits to arise at a later date. What evidence will help a claim? A clear business plan with profit and loss forecasts including market prices and production levels covering the entire loss-making period and extending into the profitable period.
It is important at the outset to evidence the expected duration of the loss-making period. Ensuring this is of sufficient length to allow for all foreseeable factors which could result in continued losses. Where profitability is delayed by these circumstances, keep clear records such as: Evidence of exceptional events such as flooding, disease outbreaks, or market disruption. Records of management decisions and business reviews such as a meeting minute. Details of changes made to improve efficiency and financial performance. Businesses should be cautious about significant changes in strategy during a loss-making period, as tribunals have found that major shifts can undermine arguments that losses were part of a coherent long-term plan. HMRC will often focus on whether losses stem from temporary circumstances or a fundamentally unprofitable business model. Key considerations include: Has the business ever made a profit? What is causing the losses?
Independent agricultural, or agronomy consultancy reports.
Have corrective actions been taken?
Correspondence with lenders and professional advisers.
Have forecasts proved realistic?
A review of actual against budget to show the forecasts are reasonable.
Is personal enjoyment a significant motivation for running the business?
You must demonstrate that any anticipated losses, or delays were identified in advance and that appropriate contingency plans were in place before the loss-making period began.
Is the business operated on a genuinely commercial basis?
For example, a competent farmer might reasonably anticipate, and plan for delays such as obtaining planning permission, or building livestock numbers at the start of the loss-making period.
Conclusion
HMRC will not allow claims for delays or losses that could not have been anticipated at the start of the loss-making period. For example, events such as the COVID-19 pandemic and the war in Ukraine could not have been foreseen by a competent farmer.
Well-documented commercial decision-making alongside early reviews of consecutive losses and supporting evidence, can help businesses prepare for any HMRC challenge and preserving the maximum valuable sideways loss reliefs available. If you would like to review your position under the five-year rule, please contact a member of our team.
05 | Staff Retention: What are your options?
Staff Retention: What are your options? Most business owners recognise the importance of retaining key employees and family members involved in the business, but increasing salaries is not always the most effective way to achieve this. This can be particularly relevant in farming and rural businesses, where family members and long-serving employees often possess invaluable operational knowledge and relationships that can be difficult to replace.
Limited companies Where the business is trading through a limited company, one increasingly popular solution is to offer key employees a stake in the business. While this may feel like a major step, even a relatively small shareholding, when combined with giving them a say in the running of the business by making them a director can often make them feel more invested in the success of the business, taking a longer-term view and aligning their interests more closely with those of the owners.
Why consider this? Potential benefits Employees: - Own part of the business, creating a greater sense of involvement in its long-term success. - May benefit financially through dividend income, or growth in value of their shares. - Remuneration increases may be delivered via dividends, although HMRC may challenge arrangements that simply replace existing salary with dividends. Employers: - Additional directors would strengthen the senior management team, future proofing the business and providing greater continuity. Key considerations Introducing employee shareholders requires careful structuring. Retaining ultimate control is often a priority for founders and existing owners. Alphabet shares can provide flexibility over dividend payments and share rights whilst preserving control. A shareholders’ agreement would be essential. This document would set out what happens if a shareholder: - Leaves, retires or dies - Becomes unable to work - Wishes to sell their shares
Employees’ contracts may need to be amended to reflect their new roles as directors and shareholders. If you decide you would like to consider making an employee a shareholder, it is essential to take advice early. This should ensure you are fully aware of the necessary steps you need to take, the tax implications and reporting requirements.
Other ways to incentivise key employees Where the business is unincorporated, or the owners do not wish to transfer shares, key employees can still be rewarded through tailored remuneration packages and could include: Performance-related bonuses Linked to individual, team or overall business performance Creating a direct relationship between effort and reward Profit-related bonuses Allows employees to share in the success of the business without acquiring an ownership interest Tax free benefits in kind Living accommodation (often customary in farming businesses and enables better performance of the duties) Mobile phones Trivial non-cash benefits (must cost < £50, and not be a reward or bonus) Additional employer pension contributions Taxable benefits Company vehicles (where available for private use) Gym memberships Private medical insurance For many farming and rural businesses, a combination of financial incentives can be just as effective as ownership in retaining the next generation of talent. With any remuneration package it is essential to understand the tax and legal implications for you and the employee, so taking advice early is advisable.
Meet the team | 06
Meet the team: Will Leonard, Director Tell us a bit about your career so far I studied Biology at university as it was my favourite subject at school, but careers in research or teaching did not appeal to me. I initially trained at a central London law firm in their trust team, studying first for my Association of Taxation Technicians, my Chartered Tax Advisor and later Society of Trust and Estate Practitioners qualifications. I then moved to a top 20 accountancy firm where I worked closely with the national head of trusts for six years, before joining Hazlewoods in June 2026.
What is it like being an accountant in the agricultural sector right now? We have been incredibly busy with estate planning following the October 2024 Budget changes to Agricultural and Business Property Relief, which has had a huge impact on farmers and landed estate owners alike, as well as business owners more generally. Many farmers who had previously intended to continue working their farms indefinitely have now actively sought estate planning advice, and we have been able to restructure farms and landed estates to ensure their continuity. Both landed estates and farms typically have a very long lineage, often being passed down within the same family
for generations, and many clients are understandably deeply concerned at the thought that they should be the generation to break the chain. UK tax law only ever seems to get more complicated, and it is very rewarding to be able to guide clients through the quagmire of legislation and cases to help ensure long-term succession, partly by mitigating any tax charges, but also by ensuring the correct ownership and control structures are in place to help facilitate the smooth running of the business to the satisfaction of all involved.
Why Hazlewoods? The firm encapsulates a very high level of sector specific and tax technical knowledge, whilst retaining the agility and benefits of an independent firm. My biology degree helps me to some extent with farming, but I am very fortunate in that many of the team grew up on farms and can support me with extensive industry knowledge (whilst I in turn can help them with the fiddly trust inheritance tax calculations!). The team culture is very friendly and welcoming, and the wide range of clients ensures that no two days are the same.
Nicholas Smail
Lucie Hammond
Ursula Bryars
Sue Birch
nicholas.smail@hazlewoods.co.uk
lucie.hammond@hazlewoods.co.uk
ursula.bryars@hazlewoods.co.uk
sue.birch@hazlewoods.co.uk
Shirley Roberts
Hannah Reason
Peter Griffiths
Pip Cusack
shirley.roberts@hazlewoods.co.uk
hannah.reason@hazlewoods.co.uk
peter.griffiths@hazlewoods.co.uk
pip.cusack@hazlewoods.co.uk
Victoria Thomas
Dan Webb
Alex Greves
victoria.thomas@hazlewoods.co.uk
daniel.webb@hazlewoods.co.uk
alex.greves@hazlewoods.co.uk
Emma Greening
Matthew Davies
Jessica Coombs
emma.greening@hazlewoods.co.uk
matthew.davies@hazlewoods.co.uk
jessica.coombs@hazlewoods.co.uk
Harry Tomlinson
Charlotte Stuart
Marcus Wehling
harry.tomlinson@hazlewoods.co.uk
charlotte.stuart@hazlewoods.co.uk
marcus.wehling@hazlewoods.co.uk
Will Leonard will.leonard@hazlewoods.co.uk
Jarvis Duthie-Jackson jarvis.duthie-jackson@hazlewoods.co.uk
01242 680000 |
hazlewoods.co.uk
This newsletter has been prepared as a guide to topics of current financial business interests. We strongly recommend you take professional advice before making decisions on matters discussed here. No responsibility for any loss to any person acting as a result of the material can be accepted by us. Hazlewoods Financial Planning LLP is a Limited Liability Partnership registered in England and Wales with number OC300764. Registered office Staverton Court, Staverton, Cheltenham, Glos, GL51 0UX. Hazlewoods Financial Planning LLP is authorised and regulated by the Financial Conduct Authority.