Alternative land uses
How to generate new income streams and reduce business risks
Housing
Developing land or adding a diversification can be profitable, but can give rise to a host of issues from planning to inheritance tax
Renewable energy
Farm-based energy projects can provide income and/or cost savings. Before committing to such installations, here are some points to consider
Biodiversity
The need for developers to provide improved biodiversity from February 2024 offers landowners opportunities, but also raises questions
Woodland creation
With generous grants on offer, trees could boost the financial resilience of some farm businesses as direct payments end
Contents
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Developing land or adding a diversification can be profitable, but can give rise to a host of issues from planning to inheritance tax. Farmers Weekly’s Suzie Horne hosted an event to help farmers dig into the detail
Changing land use: What to consider
The latest Defra farm business survey shows that 68% of UK farms have some form of diversified activity. From smaller-scale alternative business ventures such as camping and hosting weddings, to developing major solar and housing projects, there are many opportunities to use land in different ways. A Farmers Weekly event at the Houlton housing development near Rugby heard a wealth of advice on what to consider and pitfalls to avoid. PLANNING Government policies on planning are generally supportive of farm diversification, but at the local planning level this is not always upheld. Dawn Adams, associate planning director at Catesby Estates, said it could take months to assemble an application, but the outcome was decided in front of a planning committee balancing competing issues. “Politics can therefore never be removed from the planning system,” she said. Ms Adams advised applicants to make best use of their parish council or ward councillor from the outset. “They can be enormously helpful and equally obstructive, depending on their outlook on applications, so early conversations to explain the benefits of the application are helpful.” Consider making a pre-application enquiry with the local planning authority (LPA). This is optional but can help farmers understand how development policies specific to the LPA apply, identify potential problems and rectify those before a full planning application is submitted. “It can be expensive but worth the investment in setting the tone. It shows you have gone out of your way to understand the system and what the council requires,” said Ms Adams. Partnering with a third party, such as a land promoter that understands the authority and the people involved, can also result in better outcomes.
Prepare for delays Planning is not quick. “It will take longer than you think,” Ms Adams warned. Essential procedures such as ecology surveys can cause delays. Certain species surveys are required to be carried out at specific times – generally from April to October – and these can substantially delay applications or building works if they cannot be carried out until the following season. “This is why it is essential to conduct the survey as early as possible in the project,” said Ms Adams. From 12 February 2024, all planning permissions granted in England will need to demonstrate a 10% uplift in biodiversity – a biodiversity net gain (BNG) that can be achieved by creating new habitats or enhancing existing ones. “There is no requirement to have the off-setting in the same local authority area as the development, but the further away, the higher the cost,” said Ms Adams. TAX Diversification often makes good commercial sense, but without careful tax planning the favourable and generous reliefs available to farm businesses can be lost. Keith Johnston, agricultural tax specialist at accountant Armstrong Watson, said that when considering how these reliefs have been applied, HMRC looks at a farming business in the round, taking into account how the land was used and occupied. Any activity that diversified from agricultural use could risk the whole business not qualifying for agricultural property relief (APR), he warned. “It doesn’t matter how many enterprises in the traditional sense a farm business has lumped together – arable, livestock, dairy – they are taxed as one, but as soon as you diversify, in the eyes of the tax man it is not classed as agriculture.” While APR may be lost, business property relief (BPR) can in some cases be applied to help reduce inheritance tax (IHT), but this is less generous. To qualify for BPR, the land must be used for trading, to generate an income, rather than as an investment. When it comes to diversification, there could be a fine balance between qualifying for APR, BPR or losing all IHT reliefs, said Mr Johnston. “If, for example, the diversification is for battery storage and the business is paid a rent of £300,000 annually, the market value of the lease on those acres is going to be worth more than it would be for agricultural land. “It would therefore be considered an investment and wouldn’t qualify for APR, nor even BPR because, as a result, the business is at risk of being deemed to be a predominantly investment activity and no BPR is due, even on the livestock and machinery.”
Regular reviews of tax position Mr Johnston recommends regularly reviewing the business accounts to ensure that it remains predominantly a trading enterprise without too many investment activities. “It may involve getting a land agent to advise on the valuation. You have to be constantly reviewing as circumstances and valuations change.” The order in which the planned diversification happens is an important consideration. Get the timing wrong and it can mean paying 20% capital gains tax (CGT) on a sale and, after a death, the estate being liable for 40% IHT. “Reliefs are often reliant on getting the right advice in place early in the development process,” Mr Johnston advised. The recent rise in the corporation tax rate to 25%, with a further 8.75% income tax payable on dividends, makes the tax saving benefits of a company structure less significant. However, Mr Johnston points out that for someone diversifying into an activity with greater risk associated with it than farming, a company structure has the benefit of limited liability and is still appropriate in many cases. DEVELOPMENT AND LEGAL Developing land for large-scale diversification is complex, so some landowners opt to share the risk, and the rewards, with a third party. Richard Foxon, managing director of land and property agency Newton LDP, said there were several avenues available to a landowner wishing to develop strategic land, including promotion, option and hybrid agreements. “Is it money upfront that’s important, or would you rather maximise receipts at the end of the process? Not everyone wants the highest price. Legacy and quality may be a consideration rather than necessarily seeking the highest possible pay cheque,” he said. Focusing on the objective will help inform which type of agreement will work best. Strategic development could be an “emotional rollercoaster” at times, Mr Foxon added, and more often than not would take much longer than expected. “It’s important that landowners focus on their underlying business rather than lose focus due to an expectation of significant capital receipts,” he said. “Any agreement must have clear objectives, as those will form the DNA of the agreement which all obligations will link back to.” Taking advice from an experienced team of professionals at the very outset of any venture is imperative, said Mr Foxon. “Far too often we are dragged in to try to rescue a problem situation when it is sometimes too late.”
Check LPA criteria David Morris, planning and operations director at Catesby Estates, advised that for housing development, landowners should run through a checklist of important criteria that LPAs scrutinise, in order to gauge the chances of securing planning consent. “Does it look like a logical extension of the settlement, is the land protected from flooding, is there a local housing need?” he asked. “The connectivity of sites is becoming much more important too, with pressure to reduce reliance on cars, so could residents walk to the shops from the proposed site? Is there a local bus service?” Solicitor Mark Charter, of Thrings, said a promotion agreement aligned the interest of the landowner and the promoter in achieving maximum price in the open market. In such an arrangement the promoter takes on the financial risk of getting planning permission on the land and, once that is secured, finding a buyer. The cost of obtaining planning permission is reimbursed to the promoter, which also takes a cut of the land sale price. Both promoter and landowner have an interest in securing a sale at the highest price. Under an alternative route, an option agreement, Mr Charter explained that the landowner and developer were less aligned, as the developer would want to buy the land at the lowest possible price. An option agreement gives a developer the right to buy land within a specified timescale and, in return, the developer will take on the obligation of applying for planning permission at their own cost. If they are successful in obtaining planning consent, the developer can then decide whether to exercise the option and purchase the land. The price paid can either be based on open market value with a discount (and with the precise sum agreed or negotiated once planning permission is granted) or, in the case of smaller developments, be a fixed price. Where the price is based on market value with a discount, Mr Charter strongly advised that a minimum should always be stated under which the landowner is not obliged to sell. A third alternative – a hybrid agreement – is often used for big strategic housing developments because some phases will be bought by the developer entering into the hybrid agreement, under option arrangements, and other tranches sold to other developers on the open market. Mr Charter said this helped give landowners a good understanding of current land values and reassured them that the market, under a hybrid agreement arrangement, was periodically tested. Beware exclusivity He warned landowners to be wary of signing exclusivity agreements. “Don’t sign one that is longer than three months or you may find yourself unnecessarily locked out of the market,” he advised. Mr Charter said landowners may need to think about capturing future value – this could be through overage agreements which required a buyer to pay the seller a percentage of any increased value of the land in future. They also need to be careful about capturing enhanced value under leases for renewable projects, he added. Insisting on a turnover rent would allow the landowner to share the benefit of any increase in productivity resulting from the installation of new technology on an existing site.
From smaller-scale alternative business ventures such as camping and hosting weddings, to developing major solar and housing projects, there are many opportunities to use land in different ways
The event offered expert advice
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Catesby's Houlton development
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Houlton development
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MEET THE PANEL
David Morris, planning and operations director, Catesby Estates
David has worked in housebuilding, planning consultancy and property development on mixed-use projects across the UK. He sits on many housebuilding and land promotion sector committees.
Mark Charter, partner, Thrings
Mark advises on issues ranging from buying and selling farms, estates and businesses to partnerships, contract farming agreements and development, including renewables. His work covers option, promotion and hybrid agreements as well as tax advice.
Dawn Adams, associate planning director, Catesby Estates
Dawn has worked on planning in the private sector for more than 12 years, with extensive experience of delivering commercial and residential projects on both greenfield and brownfield sites.
Richard Foxon, managing director, Newton LDP
Newton LDP is a national land, development and property agency focused on planning, development and rural property. Richard specialises in strategic land, development land agency and professional consultancy work.
Headline development partner
Renewable energy partner
Development partner
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Biodiversity partner
Keith Johnston, senior tax manager, Armstrong Watson
Keith is Armstrong Watson’s agricultural tax specialist, covering accounts and tax issues. He has a detailed knowledge of capital gains tax, inheritance tax, VAT and other taxes that affect rural businesses.
Development of Houlton in stages
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Dawn Adams, Catesby's associate planning director
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About catesby estates
Catesby Estates is a specialist strategic land promotion and infrastructure business, focusing on the delivery of residential planning consents on predominantly greenfield sites and, ultimately, the onward sale to housebuilders. It works collaboratively with landowners to bring forward land to market with planning consent for housing, in order to deliver much-needed high-quality new homes throughout the country. catesbyestates.co.uk
Prepare for delays Planning is not quick. “It will take longer than you think,” Ms Adams warned. Essential procedures such as ecology surveys can cause delays. Certain species surveys are required to be carried out at specific times – generally from April to October – and these can substantially delay applications or building works if they cannot be carried out until the following season. “This is why it is essential to conduct the survey as early as possible in the project,” said Ms Adams. From 12 February 2024, all planning permissions granted in England will need to demonstrate a 10% uplift in biodiversity – a biodiversity net gain (BNG) that can be achieved by creating new habitats or enhancing existing ones. “There is no requirement to have the off-setting in the same local authority area as the development, but the further away, the higher the cost,” said Ms Adams.
TAX Diversification often makes good commercial sense, but without careful tax planning the favourable and generous reliefs available to farm businesses can be lost. Keith Johnston, agricultural tax specialist at accountant Armstrong Watson, said that when considering how these reliefs have been applied, HMRC looks at a farming business in the round, taking into account how the land was used and occupied. Any activity that diversified from agricultural use could risk the whole business not qualifying for agricultural property relief (APR), he warned. “It doesn’t matter how many enterprises in the traditional sense a farm business has lumped together – arable, livestock, dairy – they are taxed as one, but as soon as you diversify, in the eyes of the tax man it is not classed as agriculture.” While APR may be lost, business property relief (BPR) can in some cases be applied to help reduce inheritance tax (IHT), but this is less generous. To qualify for BPR, the land must be used for trading, to generate an income, rather than as an investment. When it comes to diversification, there could be a fine balance between qualifying for APR, BPR or losing all IHT reliefs, said Mr Johnston. “If, for example, the diversification is for battery storage and the business is paid a rent of £300,000 annually, the market value of the lease on those acres is going to be worth more than it would be for agricultural land. “It would therefore be considered an investment and wouldn’t qualify for APR, nor even BPR because, as a result, the business is at risk of being deemed to be a predominantly investment activity and no BPR is due, even on the livestock and machinery.”
Regular reviews of tax position Mr Johnston recommends regularly reviewing the business accounts to ensure that it remains predominantly a trading enterprise without too many investment activities. “It may involve getting a land agent to advise on the valuation. You have to be constantly reviewing as circumstances and valuations change.” The order in which the planned diversification happens is an important consideration. Get the timing wrong and it can mean paying 20% capital gains tax (CGT) on a sale and, after a death, the estate being liable for 40% IHT. “Reliefs are often reliant on getting the right advice in place early in the development process,” Mr Johnston advised. The recent rise in the corporation tax rate to 25%, with a further 8.75% income tax payable on dividends, makes the tax saving benefits of a company structure less significant. However, Mr Johnston points out that for someone diversifying into an activity with greater risk associated with it than farming, a company structure has the benefit of limited liability and is still appropriate in many cases.
DEVELOPMENT AND LEGAL Developing land for large-scale diversification is complex, so some landowners opt to share the risk, and the rewards, with a third party. Richard Foxon, managing director of land and property agency Newton LDP, said there were several avenues available to a landowner wishing to develop strategic land, including promotion, option and hybrid agreements. “Is it money upfront that’s important, or would you rather maximise receipts at the end of the process? Not everyone wants the highest price. Legacy and quality may be a consideration rather than necessarily seeking the highest possible pay cheque,” he said. Focusing on the objective will help inform which type of agreement will work best. Strategic development could be an “emotional rollercoaster” at times, Mr Foxon added, and more often than not would take much longer than expected. “It’s important that landowners focus on their underlying business rather than lose focus due to an expectation of significant capital receipts,” he said. “Any agreement must have clear objectives, as those will form the DNA of the agreement which all obligations will link back to.” Taking advice from an experienced team of professionals at the very outset of any venture is imperative, said Mr Foxon. “Far too often we are dragged in to try to rescue a problem situation when it is sometimes too late.”
Biodiversity net gain: What to consider
The need for developers to provide improved biodiversity from 12 February 2024 offers landowners opportunities, but also raises questions. Debbie James reports from a recent FW event
A planning requirement for most housing, commercial and industrial developments in England to result in a 10% biodiversity uplift offers rural landowners an opportunity to generate a diversified income stream from their land. However, with agreements typically running for 30 years and question marks over tax status and how land can be subsequently farmed, there is much to consider. The planning requirement applies in England from 12 February 2024 and is known as biodiversity net gain (BNG). It was introduced as part of the 2021 Environment Act to ensure that developers leave the natural environment in a measurably better state than it was before development. In many cases, housebuilders and others will pay farmers to meet their BNG obligations, as it will be difficult to do so on the building sites themselves. Some landowners, including the Cornwell Manor mixed farming estate, near Chipping Norton, are already creating biodiversity units by establishing hay meadows, grassland and hedgerows, often on former arable land, and being paid for the offsetting these will provide. At a recent Farmers Weekly event at Cornwell Manor, hosted by business editor Suzie Horne, experts offered advice on agreements and the associated legal and tax considerations. Agreements Broadly speaking, there are three models for landowners who want to get involved in providing off-site units. One is through an agreement with a habitat bank provider in return for rent and management payments. The land bank will then take a secure interest in the land, typically through a lease – often a farm business tenancy – and design and establish the site. It will then sell the resulting units to developers. Another option is for landowners to create their own habitat bank and deal direct with a developer. The third is to create the habitat bank, but to use a broker to act on their behalf to line up deals with developers. Which of these to opt for mostly hinges on a landowner’s appetite for risk, said Tom Mason, head of land (south) at Environment Bank. He suggests there are three key points to consider for landowners who want to enter this market, including certainty of timing.
The first is payment – understanding when these will start and how they are structured is important. There is a wide range of arrangements, from annual payments to front-loaded lump sums, and some with little certainty of payment, depending on the terms. The planning process may slow delivery in some cases. Certainty of liability is important too. “If you are a landowner working directly with a developer or as a direct provider of units, you take sole liability for delivery of those units. So if any of the habitat fails, you are solely responsible for rectifying that situation, as well as undertaking all the monitoring and reporting throughout the lifetime of the agreement,” he said. Payment stream also needs to be considered. “Understand how the payment is going to look and the tax implications that might have for your business. Is it going to be lumpy income, where you are going to get potentially a lump of money upfront and then nothing else for the rest of the agreement? Or are you going to have annual payments for 30 years over the lifetime of that agreement?” How BNG units are created Biodiversity units on land that a farmer wants to commit to BNG offsetting are calculated using a Defra metric that considers the baseline of the existing land and the planned biodiversity enhancement. The metric calculates the BNG uplift and the number of units a landowner will have available to sell according to the plan for habitat creation. As an example, arable reversion to low input grassland could be worth five or six units a hectare at the higher level, depending on the baseline condition of that land. Environment Bank ecologist Tom Rothero said everything from site selection to a management plan needed to be thought out. Look at where biodiversity can best be delivered without it negatively affecting the farming business, he advised. This might be low yielding land that requires significant inputs to achieve its potential as productive farmland. The biggest cost to farmers is the lost opportunity to farm that land, and payments are unlikely to be high enough to compensate for taking better quality land out of production. Take the current use of the land into account and also the management and existing ecological features, such as hedgerows, ponds and blocks of woodland. “It is better to have something to build upon than to start from scratch in a general sense,” he advised. Planning and permits may be required to establish features such as wetlands and ponds. An assessment from a suitably qualified ecologist is needed to establish the biodiversity baseline of a potential site. Soil chemistry needs to be ascertained – if, for example, the land is high in phosphorus, a process known as nutrient stripping may be required and this can take time to achieve. A management plan must be created to set out how the target condition of habitats will be achieved and then maintained for the 30 years of the agreement. Contingency measures should be built into that plan detailing how the situation will be rectified if a habitat fails.
Legal considerations While BNG seems to offer good opportunities for landowners there are pitfalls too, not least uncertainty over how land in an agreement may be farmed after the 30-year period ends. Harvey Davies, a solicitor in the planning and environment team at Thrings, said it was likely that the land would be subject to environmental impact assessment (EIA) regulations before it could be brought back into use for productive agriculture. The prospect of further restrictions being introduced during the lifetime of the project could not be ruled out, he said. “A question I get asked a lot is what happens after the 30 years? Can you just rip it up and go straight back to arable?” said Harvey. “I think the answer is almost certainly no. It is likely that those habitats, if you want to revert back to agriculture, will be the subject of EIA regulations. Or if there is woodland involved, there will be tree felling licence requirements under the Forestry Act, so it is going to be quite difficult to revert back.” What a landowner is seeking to deliver will be set out in a legal agreement known as a Section 106 agreement with the local planning authority (LPA), or in a conservation covenant agreement with a responsible body. The obligations in the agreement are enforceable, so if there is any dispute over these, the LPA or responsible body can seek a court injunction to ensure they are correctly delivered. Cost projects carefully There are also costs to take into account, such as registering a scheme with the off-site BNG register managed by Natural England. “There will be a fee for this, and that looks likely to beseveral hundred pounds, possibly over £1,000, depending on the size of the scheme,” Harvey explained. As well as the capital cost of establishing a scheme, there are ongoing management and maintenance expenses, and monitoring and reporting payments. “There is likely to be quite a big monitoring fee to be paid to the LPA or responsible body. They are going to be involved quite heavily in monitoring these schemes and will need to recover their costs for doing so.” Harvey advised landowners to properly cost out a scheme and decide what their revenue price point needed to be. “There is a lot of talk about the substantial sums of money that are available for biodiversity units, but it is worth reflecting that there is going to be quite a bit of work to do,” he said. Projects must deliver biodiversity benefits above any existing obligations on the land, such as those of agri-environment schemes. It is also important before considering creating BNG habitats to check for any restrictive covenants which might preclude this. However, BNG can contribute to wider nature recovery plans in addition to local objectives. Everyone with an interest in land designated as a habitat bank must be party to the Section 106 agreement, including the bank if the land has been offered as security. How land is valued when it reverts to habitat could have repercussions for the rest of the farming enterprise, Harvey warned. “If you go to the bank in the future and say ‘I need some more cash’, they might say, ‘we have got a problem here because you don’t have enough security because of the scheme you have in place’. As a consequence, they might not really be prepared to advance you the facilities that you want.”
Consider farm’s development needs Farmers will also need to provide the minimum 10% BNG uplift for their own development projects – for example, for new intensive livestock housing. However, class A agricultural development and the permitted development right, Class Q, are exempt from the 10% uplift requirement. Tax aspects Although the potential earnings from BNG units are substantial, clarity is needed from HMRC on how these payments will be treated for tax purposes, and in particular whether the change of use of the land will affect agricultural property relief (APR) from inheritance tax (IHT). BNG tax considerations are currently the subject of a consultation, which ended on 9 June 2023. This considered both income and capital tax aspects but by 24 January 2024, the government still had not clarified the tax position for BNG land. Income or capital? Neil Berry, a partner in accountant MHA, said it was possible that payments could be treated as income or capital, or a hybrid of both. “It is infinitely possible to make it an income payment through the 30-year period, but I suspect there will be arguments over whether you are creating a capital gain in some respect. For there to be a capital gain, there needs to be a disposal of something – but what is that disposal? You are keeping hold of the land, but you have probably disposed of some form of right, or similar.” APR is another area on which the industry is awaiting HMRC guidance, but Neil said that with some habitat schemes already on the statute books as qualifying for APR, it would be relatively straightforward to include new ones. However, the valuation of land in schemes would become more challenging. It is likely that BNG credits, as they are tradeable, will be liable to VAT, but only Defra has stated this; HMRC has yet to commit. “Input tax deduction will require careful planning – for example, a developer paying for works which create credits on someone else’s property may find that this creates an irrecoverable VAT cost,” he cautioned. As well as the potential income and tax unknowns of BNG, Neil said there were important business structure and generational considerations in entering such an agreement. These would include questions about the long-term aims of family members – how the land should be held, and by whom.
Look at where biodiversity can best be delivered without it negatively affecting the farming business. This might be low yielding land that requires significant inputs to achieve its potential as productive farmland Tom Rothero, Environment Bank
Message from the sponsor
Event advice included legal and planning aspects
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Ellen Fake manages south-west sites for Environment Bank
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Impression of Cornwell Manor BNG scheme, surrounded by arable
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Tom Rothero, associate director, ecology, Environment Bank
With 13 years’ commercial and ecology experience, Tom oversees the national ecology team. He has been key in establishing a network of large-scale nature recovery projects, delivering BNG in advance of the mandatory planning requirement.
Harvey Davies, solicitor, Thrings
Part of the agriculture team at Thrings, Harvey also owns and manages a farm in Herefordshire. Advising agricultural clients on planning and environmental challenges, he has developed particular expertise in natural capital markets, including BNG.
Alexander Ward, owner, Cornwell Manor
Conservation and habitat work has a long history on the 809ha mixed estate, with several projects under way on adjoining land before Alexander signed up with Environment Bank on 33.5ha. Most of the estate is in Higher Level Stewardship.
Neil Berry, chartered tax adviser, MHA
With more than 25 years’ experience, Neil advises farmers, landowners, private individuals and companies on capital and income tax planning. He also has extensive VAT, international and financial product experience.
Headline biodiversity sponsor
Environment Bank offers low-risk access to BNG income. We’re cocreating agricultural habitat banks with landowners – removing all long-term liability for BNG delivery, covering all capital costs, providing secure tax-efficient annual payments from day one, protecting landowners from price fluctuations and sharing windfall profits. Find out more at environmentbank.com
event host CORNWELL MANOR
• A 33.5ha habitat bank at the 800ha Cornwell Manor estate is generating an alternative income stream • Estate owner Alexander Ward opted for an agreement with Environment Bank • A large-scale habitat creation and restoration project is under way alongside a wetland, which he has been working on for many years • Existing parcels of grassland are being enhanced and restored. Areas of arable land are being reverted to grassland and managed as hay meadows for the benefit of wildlife • These areas are grazed at a lower intensity with cattle and sheep owned by the estate and a grazier, so the land can continue producing food while providing wildlife habitat • New ponds are part of the project. Scrub is being established to allow fields to merge with existing woodland and species-rich hedgerows to connect land parcels
David has worked in house- building, planning consultancy and property development on mixed-use projects across the UK. He sits on many housebuilding and land promotion sector committees.
Catesby’s Houlton development
About event host: Cornwell manor
A planning requirement for most housing, commercial and industrial developments in England to result in a 10% biodiversity uplift offers rural landowners an opportunity to generate a diversified income stream from their land. However, with agreements typically running for 30 years and question marks over tax status and how land can be subsequently farmed, there is much to consider. The planning requirement applies in England from 12 February 2024 and is known as biodiversity net gain (BNG). It was introduced as part of the 2021 Environment Act to ensure that developers leave the natural environment in a measurably better state than it was before development. In many cases, housebuilders and others will pay farmers to meet their BNG obligations, as it will be difficult to do so on the building sites themselves. Some landowners, including the Cornwell Manor mixed farming estate, near Chipping Norton, are already creating biodiversity units by establishing hay meadows, grassland and hedgerows, often on former arable land, and being paid for the offsetting these will provide. At a recent Farmers Weekly event at Cornwell Manor, hosted by business editor Suzie Horne, experts offered advice on agreements and the associated legal and tax considerations.
Agreements Broadly speaking, there are three models for landowners who want to get involved in providing off-site units. One is through an agreement with a habitat bank provider in return for rent and management payments. The land bank will then take a secure interest in the land, typically through a lease – often a farm business tenancy – and design and establish the site. It will then sell the resulting units to developers. Another option is for landowners to create their own habitat bank and deal direct with a developer. The third is to create the habitat bank, but to use a broker to act on their behalf to line up deals with developers. Which of these to opt for mostly hinges on a landowner’s appetite for risk, said Tom Mason, head of land (south) at Environment Bank. He suggests there are three key points to consider for landowners who want to enter this market, including certainty of timing. The first is payment – understanding when these will start and how they are structured is important. There is a wide range of arrangements, from annual payments to front-loaded lump sums, and some with little certainty of payment, depending on the terms. The planning process may slow delivery in some cases. Certainty of liability is important too. “If you are a landowner working directly with a developer or as a direct provider of units, you take sole liability for delivery of those units. So if any of the habitat fails, you are solely responsible for rectifying that situation, as well as undertaking all the monitoring and reporting throughout the lifetime of the agreement,” he said. Payment stream also needs to be considered. “Understand how the payment is going to look and the tax implications that might have for your business. Is it going to be lumpy income, where you are going to get potentially a lump of money upfront and then nothing else for the rest of the agreement? Or are you going to have annual payments for 30 years over the lifetime of that agreement?”
How BNG units are created Biodiversity units on land that a farmer wants to commit to BNG offsetting are calculated using a Defra metric that considers the baseline of the existing land and the planned biodiversity enhancement. The metric calculates the BNG uplift and the number of units a landowner will have available to sell according to the plan for habitat creation. As an example, arable reversion to low input grassland could be worth five or six units a hectare at the higher level, depending on the baseline condition of that land. Environment Bank ecologist Tom Rothero said everything from site selection to a management plan needed to be thought out. Look at where biodiversity can best be delivered without it negatively affecting the farming business, he advised. This might be low yielding land that requires significant inputs to achieve its potential as productive farmland. The biggest cost to farmers is the lost opportunity to farm that land, and payments are unlikely to be high enough to compensate for taking better quality land out of production. Take the current use of the land into account and also the management and existing ecological features, such as hedgerows, ponds and blocks of woodland. “It is better to have something to build upon than to start from scratch in a general sense,” he advised. Planning and permits may be required to establish features such as wetlands and ponds. An assessment from a suitably qualified ecologist is needed to establish the biodiversity baseline of a potential site. Soil chemistry needs to be ascertained – if, for example, the land is high in phosphorus, a process known as nutrient stripping may be required and this can take time to achieve. A management plan must be created to set out how the target condition of habitats will be achieved and then maintained for the 30 years of the agreement. Contingency measures should be built into that plan detailing how the situation will be rectified if a habitat fails.
Legal considerations While BNG seems to offer good opportunities for landowners there are pitfalls too, not least uncertainty over how land in an agreement may be farmed after the 30-year period ends. Harvey Davies, a solicitor in the planning and environment team at Thrings, said it was likely that the land would be subject to environmental impact assessment (EIA) regulations before it could be brought back into use for productive agriculture. The prospect of further restrictions being introduced during the lifetime of the project could not be ruled out, he said. “A question I get asked a lot is what happens after the 30 years? Can you just rip it up and go straight back to arable?” said Harvey. “I think the answer is almost certainly no. It is likely that those habitats, if you want to revert back to agriculture, will be the subject of EIA regulations. Or if there is woodland involved, there will be tree felling licence requirements under the Forestry Act, so it is going to be quite difficult to revert back.” What a landowner is seeking to deliver will be set out in a legal agreement known as a Section 106 agreement with the local planning authority (LPA), or in a conservation covenant agreement with a responsible body. The obligations in the agreement are enforceable, so if there is any dispute over these, the LPA or responsible body can seek a court injunction to ensure they are correctly delivered.
Cost projects carefully There are also costs to take into account, such as registering a scheme with the off-site BNG register managed by Natural England. “There will be a fee for this, and that looks likely to beseveral hundred pounds, possibly over £1,000, depending on the size of the scheme,” Harvey explained. As well as the capital cost of establishing a scheme, there are ongoing management and maintenance expenses, and monitoring and reporting payments. “There is likely to be quite a big monitoring fee to be paid to the LPA or responsible body. They are going to be involved quite heavily in monitoring these schemes and will need to recover their costs for doing so.” Harvey advised landowners to properly cost out a scheme and decide what their revenue price point needed to be. “There is a lot of talk about the substantial sums of money that are available for biodiversity units, but it is worth reflecting that there is going to be quite a bit of work to do,” he said. Projects must deliver biodiversity benefits above any existing obligations on the land, such as those of agri-environment schemes. It is also important before considering creating BNG habitats to check for any restrictive covenants which might preclude this. However, BNG can contribute to wider nature recovery plans in addition to local objectives. Everyone with an interest in land designated as a habitat bank must be party to the Section 106 agreement, including the bank if the land has been offered as security. How land is valued when it reverts to habitat could have repercussions for the rest of the farming enterprise, Harvey warned. “If you go to the bank in the future and say ‘I need some more cash’, they might say, ‘we have got a problem here because you don’t have enough security because of the scheme you have in place’. As a consequence, they might not really be prepared to advance you the facilities that you want.”
Consider farm’s development needs Farmers will also need to provide the minimum 10% BNG uplift for their own development projects – for example, for new intensive livestock housing. However, class A agricultural development and the permitted development right, Class Q, are exempt from the 10% uplift requirement. Tax aspects Although the potential earnings from BNG units are substantial, clarity is needed from HMRC on how these payments will be treated for tax purposes, and in particular whether the change of use of the land will affect agricultural property relief (APR) from inheritance tax (IHT). BNG tax considerations are currently the subject of a consultation, which ended on 9 June 2023. This considered both income and capital tax aspects but by 24 January 2024, the government still had not clarified the tax position for BNG land.
income or capital? Neil Berry, a partner in accountant MHA, said it was possible that payments could be treated as income or capital, or a hybrid of both. “It is infinitely possible to make it an income payment through the 30-year period, but I suspect there will be arguments over whether you are creating a capital gain in some respect. For there to be a capital gain, there needs to be a disposal of something – but what is that disposal? You are keeping hold of the land, but you have probably disposed of some form of right, or similar.” APR is another area on which the industry is awaiting HMRC guidance, but Neil said that with some habitat schemes already on the statute books as qualifying for APR, it would be relatively straightforward to include new ones. However, the valuation of land in schemes would become more challenging. It is likely that BNG credits, as they are tradeable, will be liable to VAT, but only Defra has stated this; HMRC has yet to commit. “Input tax deduction will require careful planning – for example, a developer paying for works which create credits on someone else’s property may find that this creates an irrecoverable VAT cost,” he cautioned. As well as the potential income and tax unknowns of BNG, Neil said there were important business structure and generational considerations in entering such an agreement. These would include questions about the long-term aims of family members – how the land should be held, and by whom.
What’s involved and what to avoid
Farm-based energy projects can provide income and/or cost savings. Before committing to such installations, everything from tax risks and legal exposure to choice of development partner needs to be considered. Debbie James reports
Land used for a farming trade benefits from important tax reliefs, but these can be lost without the right business structure or when the size of a renewables project dwarfs farming activities
Farm energy consumption
The Down Farm battery site is well screened and away from the farmstead
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Farmers Weekly business editor Suzie Horne
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The event created lively discussions
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Attendees got expert answers to their renewable energy questions
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Distance from the substation is a prime consideration when assessing potential sites
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Battery storage is an important element in the development of the UK’s renewable energy infrastructure
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Many questions centred on the suitability of sites
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Mark Charter, Partner, Thrings
Mark advises on issues ranging from buying and selling farms, estates and businesses to partnerships, contract farming and development, including renewables. His work covers option, promotion and hybrid agreements, and tax advice.
Kate Hardy, partner, Albert Goodman
Kate works closely with rural and small business clients in Dorset and Somerset, including many farms and estates. She specialises in rural diversified businesses and has a particular interest in inheritance tax and trusts.
George Hall, development manager, Conrad Energy
George has more than 17 years’ renewables experience. He develops solar PV and battery storage sites, such as the company’s 43MW solar farm in Herefordshire and a 50MW battery storage site in Somerset.
David Long, partner, design and planning, BCM
David spearheads planning and development projects across the country and has first-hand experience of securing planning consent for a wide range of renewable energy projects in rural areas.
Tim Foster, head of energy services, Conrad Energy
Part of an expert team that manages a diverse and growing energy portfolio, Tim is responsible for developing the company’s power purchase agreements and energy supply business.
Nick Keeler, director, Solar South West
Nick was one of the founding directors and commissioned the firm’s first 1MW+ rooftop solar installation in the UK, quickly followed by a 1MWp+ ground-mounted solar project at Coombe Farm, Somerset.
Headline renewable sponsor
Understanding a farm’s electricity consumption profile is a good first step to working out the value to a business of small-scale renewable energy investments. Tim Foster, head of energy services at Conrad Energy, recommended an electricity use logger as a relatively cheap device to deploy around the farm. This will take a reading every half hour, building up a picture of how energy is being consumed and pinpointing whether equipment such as compressors, fans and pumps are running when they don’t need to be. There was scope to negotiate tariffs with the farm’s energy supplier, he said. “Most customers have a general block tariff, but if you have a quirky load, see if something can be put in place to better manage that. “Ask your energy supplier to look at historical energy consumption – that data is not difficult to get hold of and they will be able to give some recommendations on how you can change your pricing structure to better meet your needs.’’
case study down farm, Hursley, hampshire
Nick Russell, host farmer for the event, opted for battery storage over solar because of its smaller land requirement. His warning to landowners contemplating energy projects is to “be careful who you get into bed with’’. The agreement with the developer he initially signed up with didn’t work out and, in October 2021, that project was bought by Conrad Energy. Nick said he was pleased with how the project had subsequently progressed, with very little interruption to day-to-day farming and the company delivering what it said it would. Getting good advice at the start is important. “Before you sign anything, you need to know what you are agreeing to. The developer often pays for the advice, so it is worth getting an experienced, top-quality solicitor or land agent involved.’’
Ensure the developer selected has sufficient funds to carry the project through. “There are some that can’t go through with what they have promised,’’ said Nick. Preserving the right to the grid connection is also vital. “You need to own the connection or have an agreement in place stating that if it all goes wrong, you get it back – the connection is what is worth the money.’’ Planning can be a hurdle. “No one can see our site, but it still had lots of objections,’’ said Nick.
Producing clean electricity is predicted to one day outstrip rural tourism as a secondary income for UK farms. Interest in investing in renewables or leasing sites to developers is high, from small- and large-scale solar and battery storage to wind turbines and anaerobic digestion (AD) plants. Hampshire arable farmer Nick Russell was approached by 200 solar developers before he leased land to Conrad Energy as a battery storage site. At a recent Farmers Weekly event on his farm near Winchester, Hampshire, experts offered advice on what to consider and some pitfalls to avoid. TAX Land used for a farming trade benefits from important tax reliefs, but these can be lost without the right business structure or when the size of a renewables project dwarfs farming activities. If the landowner receives the income personally, it could be subject to additional rates of income tax and, at high levels, restrict their tax-free personal allowance, warned tax adviser and accountant Kate Hardy, of Albert Goodman. How the business is structured is key to getting the best tax position. A sole trader or those in a family partnership will be taxed on the income personally, whereas in a company structure the income will be taxed on the company, potentially at a lower rate. The figures involved can be substantial. In simple terms, a 35-year solar project earning £100,000/year would generate income of £3.5m, said Kate. “If taxed on you personally and assuming you already receive £30,000/year, at 2023-24 rates and allowances the additional tax liability would be £1.443m,’’ she calculated. In a company structure, this reduces to £796,000, equating to a tax saving of £647,000.
To establish the project within a company, Kate advised that the project land is sold to the company – in most circumstances at the open market value (OMV). Capital gains tax (CGT) would be payable on the net gain, but the proceeds in the company could be drawn down tax-free. Alternatively, if it is gifted to the company this is still a disposal at OMV, but if the land qualifies for agricultural property relief (APR) from inheritance tax (IHT), holdover relief can be claimed and there is no immediate CGT charge. “This does then mean funds aren’t available to draw down in the company, so a mix of the two options is normally preferable,’’ Kate suggested. Care should be taken to ensure stamp duty land tax implications have been considered and reliefs are available. “You also need to ensure the transfer doesn’t result in an immediate charge to inheritance tax under the chargeable lifetime transfer rules – hence the request a clause indemnifying them against loss if the operator causes damage when accessing the site for surveys and other work that can’t be made good. The contract should also include a clause specifying a minimum acreage acceptable to the landowner for the project. “If the operator gets planning on only a small acreage, the disruption to the farm might make the project need to include professionals from the start,’’ said Kate. A solar farm or battery storage site is not classed as being occupied for the purposes of agriculture, so APR would be denied. This can result in a significant tax liability.
Without APR, land that doubles in value to £20,000/acre as a result of development will have a potential IHT liability of £8,000/acre. If it fails to qualify for APR, it then can’t be gifted tax-free, so there would also be a CGT liability of £4,000/acre. “With income of £1,000/acre, it could take 13.5 years of net income to pay the IHT,’’ Kate explained. Business property relief (BPR) does not apply if the business consists wholly or mainly in dealing with land or holding investments and, as the lease of a solar farm or battery storage site is treated as “holding an investment”, BPR would also be denied. However, if it can be established that the business is mainly trading, in principle there is no reason why its full value should not qualify for BPR, said Kate. She advised landowners considering a renewables project to obtain advice from the outset to help mitigate the tax and safeguard their IHT position. LEGAL Projects are mostly done in three stages, starting with negotiations and heads of terms, followed by agreeing the contract and ending with completion, usually culminating in a lease being granted. Mark Charter of law firm Thrings said it was vital to get the right advice when negotiating heads of terms. “Landowners sometimes sign heads of terms without advice simply to crack on with the project, but if they get the commercial terms wrong at that stage, those mistakes can be magnified over 30-40 years, across the lifetime of the lease.’’ When it comes to exclusivity agreements, with the landowner agreeing not to talk to other developers for a set period, Mark recommended this should be no longer than three months. “If you break the exclusivity obligations, you may well have to pay the solar operator’s costs and they can be significant,’’ he said. As there can be a three-year gap between a contract being signed and the site becoming operational, to protect future revenue Mark advised that minimum rent requirements should be specified to avoid the landowner being forced to trade at below market rents.
A clause requiring a “turnover” rent is also recommended to account for advances in technology, which will earn the developer more income – Mark said he was typically seeing 4-6% turnover rents. This means that when, for example, 6% of the developer’s revenue from the installation exceeds the acreage-based rent, the landowner is paid a top-up between the two figures. Landowners should also reserve the right to exploit future natural capital benefits from the site. A remediation fund, also known as a “sinking” fund, built up by the developer and which the landowner can resort to, is essential to cover the cost of restoring the land to its pre-development position, as the costs associated with this can be significant. “It gives the landowner comfort if the developer fails to carry out remediation or goes out of business,’’ said Mark. Such funds are usually built up over the 10-15 years before the lease expires. GRID CONNECTION A major constraint to renewable energy development is grid capacity – if a connection can’t be established, the project is a non-starter. George Hall leads on “front of the meter” renewable development for Conrad Energy and is optimistic that this is changing. He reckoned that the first quarter of 2024 would see an increase in the number of operators securing connections. Distance between the site and an electricity sub-station is a factor when developers consider sites. George said up to two miles was considered workable, but it depended on what sits between the site and the sub-station, with fields being more favourable than a highway. For battery storage sites, import and export connections are needed. Rental values for battery sites broadly range from £1,750-£2,000/ MW, or £15,000-£25,000/acre, depending on access, layout, screening and planting. When choosing a developer to work with, George said it was important that it had a good track record, was well financed and experienced in multiple technologies.
Dawn Adams, Catesby’s associate planning director
Distance from the substation is a prime consideration
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Producing clean electricity is predicted to one day outstrip rural tourism as a secondary income for UK farms. Interest in investing in renewables or leasing sites to developers is high, from small- and large-scale solar and battery storage to wind turbines and anaerobic digestion (AD) plants. Hampshire arable farmer Nick Russell was approached by 200 solar developers before he leased land to Conrad Energy as a battery storage site. At a recent Farmers Weekly event on his farm near Winchester, Hampshire, experts offered advice on what to consider and some pitfalls to avoid.
TAX Land used for a farming trade benefits from important tax reliefs, but these can be lost without the right business structure or when the size of a renewables project dwarfs farming activities. If the landowner receives the income personally, it could be subject to additional rates of income tax and, at high levels, restrict their tax-free personal allowance, warned tax adviser and accountant Kate Hardy, of Albert Goodman. How the business is structured is key to getting the best tax position. A sole trader or those in a family partnership will be taxed on the income personally, whereas in a company structure the income will be taxed on the company, potentially at a lower rate. The figures involved can be substantial. In simple terms, a 35-year solar project earning £100,000/year would generate income of £3.5m, said Kate. “If taxed on you personally and assuming you already receive £30,000/year, at 2023-24 rates and allowances the additional tax liability would be £1.443m,’’ she calculated. In a company structure, this reduces to £796,000, equating to a tax saving of £647,000.
To establish the project within a company, Kate advised that the project land is sold to the company – in most circumstances at the open market value (OMV). Capital gains tax (CGT) would be payable on the net gain, but the proceeds in the company could be drawn down tax-free. Alternatively, if it is gifted to the company this is still a disposal at OMV, but if the land qualifies for agricultural property relief (APR) from inheritance tax (IHT), holdover relief can be claimed and there is no immediate CGT charge. “This does then mean funds aren’t available to draw down in the company, so a mix of the two options is normally preferable,’’ Kate suggested. Care should be taken to ensure stamp duty land tax implications have been considered and reliefs are available. “You also need to ensure the transfer doesn’t result in an immediate charge to inheritance tax under the chargeable lifetime transfer rules – hence the request a clause indemnifying them against loss if the operator causes damage when accessing the site for surveys and other work that can’t be made good.
The contract should also include a clause specifying a minimum acreage acceptable to the landowner for the project. “If the operator gets planning on only a small acreage, the disruption to the farm might make the project need to include professionals from the start,’’ said Kate. A solar farm or battery storage site is not classed as being occupied for the purposes of agriculture, so APR would be denied. This can result in a significant tax liability. Without APR, land that doubles in value to £20,000/acre as a result of development will have a potential IHT liability of £8,000/acre. If it fails to qualify for APR, it then can’t be gifted tax-free, so there would also be a CGT liability of £4,000/acre. “With income of £1,000/acre, it could take 13.5 years of net income to pay the IHT,’’ Kate explained. Business property relief (BPR) does not apply if the business consists wholly or mainly in dealing with land or holding investments and, as the lease of a solar farm or battery storage site is treated as “holding an investment”, BPR would also be denied. However, if it can be established that the business is mainly trading, in principle there is no reason why its full value should not qualify for BPR, said Kate. She advised landowners considering a renewables project to obtain advice from the outset to help mitigate the tax and safeguard their IHT position.
LEGAL Projects are mostly done in three stages, starting with negotiations and heads of terms, followed by agreeing the contract and ending with completion, usually culminating in a lease being granted. Mark Charter of law firm Thrings said it was vital to get the right advice when negotiating heads of terms. “Landowners sometimes sign heads of terms without advice simply to crack on with the project, but if they get the commercial terms wrong at that stage, those mistakes can be magnified over 30-40 years, across the lifetime of the lease.’’ When it comes to exclusivity agreements, with the landowner agreeing not to talk to other developers for a set period, Mark recommended this should be no longer than three months. “If you break the exclusivity obligations, you may well have to pay the solar operator’s costs and they can be significant,’’ he said. As there can be a three-year gap between a contract being signed and the site becoming operational, to protect future revenue Mark advised that minimum rent requirements should be specified to avoid the landowner being forced to trade at below market rents. A clause requiring a “turnover” rent is also recommended to account for advances in technology, which will earn the developer more income – Mark said he was typically seeing 4-6% turnover rents. This means that when, for example, 6% of the developer’s revenue from the installation exceeds the acreage-based rent, the landowner is paid a top-up between the two figures. Landowners should also reserve the right to exploit future natural capital benefits from the site. A remediation fund, also known as a “sinking” fund, built up by the developer and which the landowner can resort to, is essential to cover the cost of restoring the land to its pre-development position, as the costs associated with this can be significant. “It gives the landowner comfort if the developer fails to carry out remediation or goes out of business,’’ said Mark. Such funds are usually built up over the 10-15 years before the lease expires.
GRID CONNECTION A major constraint to renewable energy development is grid capacity – if a connection can’t be established, the project is a non-starter. George Hall leads on “front of the meter” renewable development for Conrad Energy and is optimistic that this is changing. He reckoned that the first quarter of 2024 would see an increase in the number of operators securing connections. Distance between the site and an electricity sub-station is a factor when developers consider sites. George said up to two miles was considered workable, but it depended on what sits between the site and the sub-station, with fields being more favourable than a highway. For battery storage sites, import and export connections are needed. Rental values for battery sites broadly range from £1,750-£2,000/ MW, or £15,000-£25,000/acre, depending on access, layout, screening and planting. When choosing a developer to work with, George said it was important that it had a good track record, was well financed and experienced in multiple technologies.
Practical advice on woodland creation
By 2050, 16.5% of the UK will be covered by trees – that is the government’s aspiration. Tree cover currently sits at 10% in England, so there is some way to go and that’s why some of the financial incentives, such as the England Woodland Creation Offer (Ewco), are at their most generous ever. Some landowners, including third-generation mixed farmer Neil Macdonald, have embraced this. He is planting 13.3ha of grassland at Orchard Park Farm, near Shepton Mallett, with native broad-leaf trees, funded by an Ewco grant. However, farmers must often find the cash upfront to do the work before grants are paid. Diversifying into woodland on a commercial scale has implications for tax reliefs, too. At a Farmers Weekly event at Orchard Park Farm, experts offered advice on the considerations. Finance and planning Grants are an important source of funding, but Marc Liebrecht, head of forestry and arboriculture at Carter Jonas, warns that woodland schemes should never be grant-driven. Landowners should first consider if trees fit with their objectives and if grants can help deliver those. “I am a big believer that schemes shouldn’t be driven by the grants that are available. Look at what you want to do – is the woodland for amenity, shelter, diversification or a combination of some or all of these – and then tap into the grants,’’ said Marc. Consider any planting constraints, and species suited for the site and purpose. The Forestry Commission’s map browser (go online to bit.ly/forestry-land-use) is useful for working out land sensitivities, access and other constraints. It has a woodland creation tool to assess the scope for additional payments.
While technology is useful, practical groundwork is also important, said Marc. “I recommend going out and sticking a spade in the ground to establish soil type and moisture regime. Gather as much historical information as you can for that site, and then go to the tool to produce a geo-reference list of all the species that are compatible with that site.” Spacing, stocking density and planting patterns are the next consideration, while an important constraint is the availability of young trees. “Tree availability is a big issue at the moment. Nurseries are slowly gearing up, but there hasn’t been enough trees to match demand, so speak to your nurseries early on in the process.” Grant eligibility It is critical that the necessary paperwork and due diligence is completed at an early stage when planning a grant application. This can be done on the Rural Payments Agency (RPA) site, or the equivalent agency in the devolved UK countries. “There have been many times when we have submitted an Ewco application and were advised by the RPA that the parcel wasn’t registered for entitlements,” Marc explained. Another common issue is when tenants have entered the land parcel into a different scheme, but haven’t notified the landlord or agent. This can seriously delay finalising and approval of the scheme. “In some cases these are permanent options, but others can be moved. Speak to the RPA to see if they can be taken out and adjusted,” said Marc. The applicant or, where applicable, any counter-signatories must have full management control of the parcel and it must not be the subject of any disputes. The parcel must not already be classified as a woodland or, in the case of Ewco, in a grant agreement that has more than five months left to run at the time of submitting the application. If the land or part of it is in an environmental stewardship agreement, it may be possible to transfer the land into Ewco if certain conditions are met.
Tax The tax regime for woodland, particularly commercial forestry, is advantageous, but there can be pitfalls associated with the loss of generous reliefs available to agriculture. Commercial woodland is outside the scope of tax, so there is no tax to pay on income from the sales it generates. On the flip side, no tax relief can be claimed on expenses incurred in establishing and managing commercial woodland. If the woodland is classified as amenity or short-rotation coppice, income from the sale of wood is taxable because it is part of the general farming business. Rental income from sporting or recreational activities such as paintballing is taxable because it is not part of the forestry enterprise. Provided there is an intention to generate taxable supplies from a woodland, it can be registered for VAT on day one and the costs associated with planting, infrastructure and equipment can be recovered, said Nicholas Smail, farms and estates partner at accountant Hazlewoods.
If the woodland is part of a wider VAT-registered farming business it will not need to be separately registered for VAT. “It may be some time before you reach the threshold of £85,000, but that doesn’t matter because you have that intention at some point in the future to make taxable supplies,” said Nicholas, who listed other considerations: • How HMRC views grant payments depends on how they are described by the funding body • If the grant provides an income to replace farming income that would have been generated from that land, that part of it is taxable • If the landowner sells the woodland the trees are not subject to capital gains tax (CGT), but any gain on the underlying land is, which can raise interesting valuation questions • CGT rollover relief applies if woodland is sold and the money invested in land used in a farming or other trading business, with the tax paid at some point in the future when that land is eventually sold or gifted • If the woodland is gifted – for succession planning, for example – holdover relief can be claimed, with the tax again paid when the recipient sells it • Business asset disposal relief (formerly entrepreneur’s relief), will reduce the CGT rate from 20% to 10% for up to £1m of gain. For inheritance tax (IHT), business property relief (BPR) applies to commercial woodland, providing 100% relief. To qualify for BPR, the business must be wholly or mainly trading (at least 51%). Shelter belts and amenity woodland will qualify for agricultural property relief (APR) provided these are part of an agricultural business. When neither BPR nor APR applies, there is another option – Woodland Relief. This exempts the value of the trees from IHT, but not the value of the underlying land. Woodland creation can potentially affect APR on the farmhouse. To qualify for APR, the house must be occupied for the purposes of agriculture and be of an appropriate character. “If too much of the farm is put down to woodland, there is a risk that you are no longer occupying the farmhouse for agriculture and HMRC will say that it is no longer character appropriate, so you could lose APR on the farmhouse,’’ warned Nicholas, adding that tax advice should be sought on individual circumstances when planning woodland projects.
The tax regime for woodland, particularly commercial forestry, is advantageous, but there can be pitfalls associated with the loss of generous reliefs available to agriculture
FW business editor Suzie Horne
A mid-field runway is one of the plantings at Orchard Park Farm
The events also provide social and networking opportunities
Nicholas Smail, partner, Hazlewoods farms and estates team
Nicholas specialises in private client tax for landed estates, family businesses, wealthy individuals and trustees. He is a member of the Gloucestershire branch committee of the Country Land and Business Association.
Marc Liebrecht, head of forestry, Carter Jonas
Marc specialises in the delivery of forest and woodland management, tree safety surveys and forest valuations. He also plays an active role in the natural capital team, with a focus on carbon sequestration and biodiversity net gain.
Jo Garlick, land use adviser, Forestry Commission
Jo has a special interest in woodland habitats and the farm grant landscape. She covers Devon, west Somerset and Cornwall and advises on grants and incentives, as well as identifying opportunities for tree planting and woodland management.
Thomas Mansfield, farm environment adviser, Farming & Wildlife Advisory Group
Thomas specialises in woodland creation and management planning, working with partners and farmers to create, manage and restore wildlife habitats that provide multiple benefits within the landscape.
Headline partner
Neil Duffield, field manager, Forestry Commission
Neil’s background includes woodland site management and advising on sustainable land management. He offers guidance on woodland design and funding for landowners to add or improve woodland on their land.
event host ORCHARD PARK FARM
Neil Macdonald says getting professional advice and support to submit a woodland creation grant application is critical. “As farmers, we are juggling so many things that we need to seek professional advice – we don’t have all those skills. Find yourselves a good strategic partner, like I have done with the Farming and Wildlife Advisory Group [Fwag] – it is absolutely critical.” Neil had already established a 40ha apple orchard at Orchard Park Farm, a 113ha holding he bought 12 years ago. His Fwag membership gave him access to support to plan for planting a further 13.3ha with native broad-leaf trees with an England Woodland Creation Offer (Ewco) grant. This land had been earning him £198/ha a year in rent from graziers. The plan was developed with advice from Fwag South West farm environment adviser Thomas Mansfield. It took 25 months from applying to the Forestry Commission for a Woodland Creation Planning Grant, which supports the design of the new woodland, to planting the first trees in March 2023. “Two years isn’t a long
time if you consider the longevity of the enterprise you are entering into, and if it means that you think about it more carefully and put it together with a bit more accuracy, it is probably not the end of the world.” The Forestry Commission said the process now takes less time. Finding the money for the scheme before the grant is paid can be the biggest barrier, said Neil. “It is all very well picking up these grants, but someone has to come up with the cash to do it in the first place. If we hadn’t been able to break it down into smaller parcels, we wouldn’t have been able to afford to do it.” The scheme will be completed in 2025, with additional income streams to the grant payments needed to make the project financially viable. “We have to be very creative beyond the grants, maintenance payments and other bits and pieces. Those alone are not going to pay the bills, so we have to think more broadly,’’ said Neil.
An extensive farm walk prompted discussion of the approach to planting
Ash dieback has led to a good deal of felling at Orchard Park Farm
benefits of tree planting
Integrating trees on farms can help mitigate some of the effects of climate change on livestock and soils. Jo Garlick, land use adviser at the Forestry Commission, said last summer’s intense heat, followed by the autumn deluge, had shown the importance of trees and hedges for shade and shelter. “Flooding, cold and snow all have an effect on our animals and can lead to mortality. However, if you plant trees in the right place they are part of the solution,” she said, pointing out that the grants available are the most generous they have ever been. In England, to get landowners started there is the Woodland Creation Planning Grant, which is capped at £30,000 and open to landowners with 5ha of land, with a minimum block of 0.5ha for planting. The England Woodland Creation Offer, administered by the Forestry Commission, covers standard capital costs up to £10,200/ha and stackable payments of up to £8,000/ha for projects that support wider benefits to society, nature recovery and the environment.
Headline renewable partner
Nick Russell, host farmer for the event, opted for battery storage over solar because of its smaller land requirement. His warning to landowners contemplating energy projects is to “be careful who you get into bed with’’. The agreement with the developer he initially signed up with didn’t work out and, in October 2021, that project was bought by Conrad Energy. Nick said he was pleased with how the project had subsequently progressed, with very little interruption to day-to-day farming and the company delivering what it said it would. Getting good advice at the start is important. “Before you sign anything, you need to know what you are agreeing to. The developer often pays for the advice, so it is worth getting an experienced, top-quality solicitor or land agent involved.’’ Ensure the developer selected has sufficient funds to carry the project through. “There are some that can’t go through with what they have promised,’’ said Nick. Preserving the right to the grid connection is also vital. “You need to own the connection or have an agreement in place stating that if it all goes wrong, you get it back – the connection is what is worth the money.’’ Planning can be a hurdle. “No one can see our site, but it still had lots of objections,’’ said Nick.
By 2050, 16.5% of the UK will be covered by trees – that is the government’s aspiration. Tree cover currently sits at 10% in England, so there is some way to go and that’s why some of the financial incentives, such as the England Woodland Creation Offer (Ewco), are at their most generous ever. Some landowners, including third-generation mixed farmer Neil Macdonald, have embraced this. He is planting 13.3ha of grassland at Orchard Park Farm, near Shepton Mallett, with native broad-leaf trees, funded by an Ewco grant. However, farmers must often find the cash upfront to do the work before grants are paid. Diversifying into woodland on a commercial scale has implications for tax reliefs, too. At a Farmers Weekly event at Orchard Park Farm, experts offered advice on the considerations.
Finance and planning Grants are an important source of funding, but Marc Liebrecht, head of forestry and arboriculture at Carter Jonas, warns that woodland schemes should never be grant-driven. Landowners should first consider if trees fit with their objectives and if grants can help deliver those. “I am a big believer that schemes shouldn’t be driven by the grants that are available. Look at what you want to do – is the woodland for amenity, shelter, diversification or a combination of some or all of these – and then tap into the grants,’’ said Marc. Consider any planting constraints, and species suited for the site and purpose. The Forestry Commission’s map browser (go online to bit.ly/forestry-land-use) is useful for working out land sensitivities, access and other constraints. It has a woodland creation tool to assess the scope for additional payments. While technology is useful, practical groundwork is also important, said Marc. “I recommend going out and sticking a spade in the ground to establish soil type and moisture regime. Gather as much historical information as you can for that site, and then go to the tool to produce a geo-reference list of all the species that are compatible with that site.” Spacing, stocking density and planting patterns are the next consideration, while an important constraint is the availability of young trees. “Tree availability is a big issue at the moment. Nurseries are slowly gearing up, but there hasn’t been enough trees to match demand, so speak to your nurseries early on in the process.
Grant eligibility It is critical that the necessary paperwork and due diligence is completed at an early stage when planning a grant application. This can be done on the Rural Payments Agency (RPA) site, or the equivalent agency in the devolved UK countries. “There have been many times when we have submitted an Ewco application and were advised by the RPA that the parcel wasn’t registered for entitlements,” Marc explained. Another common issue is when tenants have entered the land parcel into a different scheme, but haven’t notified the landlord or agent. This can seriously delay finalising and approval of the scheme. “In some cases these are permanent options, but others can be moved. Speak to the RPA to see if they can be taken out and adjusted,” said Marc. The applicant or, where applicable, any counter-signatories must have full management control of the parcel and it must not be the subject of any disputes. The parcel must not already be classified as a woodland or, in the case of Ewco, in a grant agreement that has more than five months left to run at the time of submitting the application. If the land or part of it is in an environmental stewardship agreement, it may be possible to transfer the land into Ewco if certain conditions are met.
If the woodland is part of a wider VAT-registered farming business it will not need to be separately registered for VAT. “It may be some time before you reach the threshold of £85,000, but that doesn’t matter because you have that intention at some point in the future to make taxable supplies,” said Nicholas, who listed other considerations: • How HMRC views grant payments depends on how they are described by the funding body • If the grant provides an income to replace farming income that would have been generated from that land, that part of it is taxable • If the landowner sells the woodland the trees are not subject to capital gains tax (CGT), but any gain on the underlying land is, which can raise interesting valuation questions • CGT rollover relief applies if woodland is sold and the money invested in land used in a farming or other trading business, with the tax paid at some point in the future when that land is eventually sold or gifted • If the woodland is gifted – for succession planning, for example – holdover relief can be claimed, with the tax again paid when the recipient sells it • Business asset disposal relief (formerly entrepreneur’s relief), will reduce the CGT rate from 20% to 10% for up to £1m of gain.
For inheritance tax (IHT), business property relief (BPR) applies to commercial woodland, providing 100% relief. To qualify for BPR, the business must be wholly or mainly trading (at least 51%). Shelter belts and amenity woodland will qualify for agricultural property relief (APR) provided these are part of an agricultural business. When neither BPR nor APR applies, there is another option – Woodland Relief. This exempts the value of the trees from IHT, but not the value of the underlying land. Woodland creation can potentially affect APR on the farmhouse. To qualify for APR, the house must be occupied for the purposes of agriculture and be of an appropriate character. “If too much of the farm is put down to woodland, there is a risk that you are no longer occupying the farmhouse for agriculture and HMRC will say that it is no longer character appropriate, so you could lose APR on the farmhouse,’’ warned Nicholas, adding that tax advice should be sought on individual circumstances when planning woodland projects.
