What effect might the Budget have on natural capital markets?
Weakening the availability of Agricultural Property Relief (APR) from Inheritance Tax (IHT) could damage the development of natural capital markets.
Tax uncertainty and lack of incentive will discourage private landowners from negotiating terms and entering into the legal agreements with other parties which are needed to grow the sector, meaning less land will be available for habitat and hedgerow creation, woodland planting, freshwater management and other environmental purposes.
APR allows agricultural land to be passed free from IHT during periods of succession provided that numerous elements are met. It is a complex relief and if claimed successfully, results in a full or 50% rate of relief.
The definitions of agricultural and non-agricultural use have been disputed with HMRC over time. Inevitably, questions are being asked about whether land used for a natural capital scheme falls into an existing interpretation of agricultural use, even though the activity might be better described as environmental or ecological.
There are many nuances, for example, cases of land being used for both farming and a habitat creation scheme, or cases where land can join multiple natural capital markets due to the existence of more than one natural ‘asset’ (this is a concept called stacking).
Clearly there is a need to review and clarify the tax policy around land used for natural capital, with APR being one part of this.
This process began with the previous government: a 2023 consultation led to a decision in March 2024 to extend APR to land managed under an environmental agreement, including but not seemingly limited to the public Environmental Land Management schemes (also known as agri-environment schemes, these provide funding to landowners and tenants undertaking specific activities). The term ‘environmental agreements’ seemed wide and flexible enough to include a range of public and private legal agreements.
While the interconnection between APR and natural capital markets might have been overlooked in the pre-Budget reports, it is hoped that this will not be the case when the Budget is announced shortly.
Given the UN’s biodiversity COP16 currently taking place to focus governments on what they must do to meet global nature targets by 2030, it would make sense for the Chancellor to support the future of natural capital markets in the UK.
