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HMRC's technical note of 14 May 2026 settled a question that had been open since biodiversity net gain became mandatory in February 2024: receipts from BNG units, nutrient credits and most non-woodland carbon credits are taxed as trading income, not capital. Land in a qualifying environmental agreement stays eligible for Agricultural Property Relief from 6 April 2025. But the 30-year commitment, the additionality rule and the VAT position mean the offer letter and the accounts read differently.
The pitch that reaches farmers now, whether from a broker, a developer or a local land agent, tends to describe biodiversity net gain in terms of price per unit and length of agreement. A hectare of low-quality grassland converted to species-rich meadow might produce ten to twenty biodiversity units. Units in the South East have traded at £15,000 to £30,000 depending on habitat type and distinctiveness score. Multiplied out, the numbers look attractive against the arable margins of a difficult year. What the pitch rarely does is set the receipt in the context of the whole-farm tax position, the covenant obligations and the interaction with existing agri-environment agreements.
How HMRC treats BNG payments after the May 2026 note
HMRC's starting position, set out in the technical note published on 14 May 2026, is that payments for ecosystem services will usually be taxed as income. That includes receipts for biodiversity units, nutrient neutrality credits and carbon credits under the Peatland Code. Where the land continues to be farmed alongside the environmental use, or where the area taken out of production is not substantial in the context of the whole holding, the income can sit within the existing farming trade. Where the environmental activity is more standalone, HMRC's view is that a new trade is created, with the compliance and reporting implications that come with that.
There is one meaningful exception. Income and expenditure relating to carbon or other credits generated on commercial woodland do not form part of a trade. The distinct tax treatment that has always applied to commercial woodland is preserved. That matters for farms with existing woodland blocks and for those considering Woodland Carbon Code planting on new areas, because the tax result on a hectare of new woodland is different from the tax result on a hectare of species-rich meadow.
The note also touches on the buyer side. Payments for BNG units or nutrient credits may be deductible for the developer for income or corporation tax purposes, depending on the circumstances. Carbon credits depend on why they were acquired, particularly whether they were required for regulatory compliance. That matters when negotiating the terms of the agreement, because how the receipt is characterised in the developer's accounts influences how they will want the contract drafted.
Additionality: the point where deals fall over
The additionality rule is the one that most often catches farmers already in an SFI or Countryside Stewardship agreement. Under Natural England's guidance, biodiversity units can only be sold for ecological improvements that would not have happened without the sale of those units. An outcome already funded through SFI cannot be sold again as a BNG unit. For a farm with a Countryside Stewardship agreement on the same fields being pitched for BNG, or an SFI action that overlaps with the proposed habitat, this is not a technicality. The registered biodiversity gain site plan has to demonstrate that the habitat gain is genuinely additional. Where it cannot, the sale is unsound, and the responsible bodies that sign covenants will not approve it.
Additionality is the rule that turns a promising second income into a legal problem, and it catches farms already in an SFI agreement most often.
Stacking across markets, for example a BNG sale on land that also produces Woodland Carbon Code credits, is legally possible where the outcomes are genuinely separate. In practice it requires structured advice on how the covenant is drafted and how the credits are apportioned. It is not the default position and it is not simple. Farms being told the deal on the table can stack with an existing agri-environment agreement should look for the written additionality analysis before the contract is signed, not the assurance that it will follow.
What the 30-year covenant actually commits you to
The minimum securing period for off-site BNG is 30 years, running from the date of the agreement, secured either by a section 106 agreement with the local planning authority or by a conservation covenant with a designated responsible body. The obligation runs with the land. A 30-year covenant reduces the range of things a subsequent owner or tenant can do with that field, and it will show in a sale valuation and in a lender's security assessment.
A farming family looking at BNG on a corner of the holding should be considering not only the income across the covenant period, but the effect on the whole-farm balance sheet, the position of any bank facility secured against the land, and the succession picture. For families where the land is likely to move between generations inside the covenant period, this needs to be discussed before the deal is signed, not after. Reversing a covenant is not a straightforward matter, and there is no established secondary market for BNG obligations.
APR, BPR and the current position
Since 6 April 2025, land under qualifying environmental management, including BNG agreements, has been eligible for Agricultural Property Relief. That removed one of the main deterrents that had held farmers back from signing during 2024. Business Property Relief remains available in many cases, particularly where the landowner remains actively involved in habitat creation and maintenance. Passive receipt of BNG income from land that has been effectively let out to a third-party manager sits closer to the investment end of the spectrum, and BPR is more likely to be challenged. The April 2026 reforms to the £1 million combined APR and BPR allowance sit over all of this and change the arithmetic on succession for families holding land worth significantly above that threshold, which is a separate conversation and one worth having in parallel.
VAT and the shape of the cash
VAT is chargeable on the sale of biodiversity units at the standard rate. For farming businesses already registered for VAT, this is a mechanical addition to quarterly returns. For farms not currently registered because turnover sits under the threshold, a large one-off BNG receipt will often push the business over. The registration decision, and the option to voluntarily register earlier, should be looked at in the same conversation as the deal itself, not after the first invoice has been raised.
Cashflow inside a BNG agreement is rarely front-loaded to match the effort required. Habitat establishment costs, monitoring costs and management costs run through the early years, and unit sales are typically staged around the delivery of measurable habitat condition scores. The cash pattern does not always match the tax pattern. Where income is recognised on an accruals basis at contract stage while cash comes in over several years, farms can find themselves paying tax on money they have not yet received. The payment schedule inside the contract, and its interaction with the accounting policy, is worth looking at before signing rather than after.
The questions worth having answered before signing
Any farm approached about a BNG deal should have clean answers to a short list of questions before the covenant is signed. What is the tax treatment expected to be, income or capital, and does the whole-farm trading position support that? Does the proposed habitat clash with any current or planned SFI or Countryside Stewardship action, and can additionality be demonstrated on paper? Is the land currently offered as security to a lender, and what will the covenant do to the lender's view? What is the succession position across the 30-year term, and does the covenant sit comfortably with the family's medium-term plans for the land? Are the payment stages structured so the cash matches the tax, or is there a gap that needs financing?
None of these questions should stop a good BNG deal from going ahead. They should stop a bad one from being signed on the basis of a headline number.
To discuss BNG structuring or the wider tax position for rural estates, contact the agribusiness team.
This article has been prepared for information purposes only. Formal professional advice is strongly recommended before making decisions on the topics discussed in this release. No responsibility for any loss to any person acting, or not acting, as a result of this release can be accepted by us, or any person affiliated with us.
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