Agriculture and Rural Business newsletter – December 2021

Tax considerations for natural Capital
Game Fair 2021
P&J Farming Breakfast


Tax considerations for natural Capital

Conversations about climate change are taking place around the world  – what needs to be done, what can be done and how.  Scottish and UK governments are in the process of shaping their policies and their tax legislation.  Following COP26, we expect changes and announcements to the legislation on how natural capital will be taxed but what are the current considerations?

The information can be overwhelming and the agricultural sector is particularly affected.   Farmers and landowners have a role to play in the race to net zero, not just in cutting their own carbon emissions, but in helping others offset theirs. They must keep in mind how changes they make will affect the financial position and be aware of any potential tax consequences. 

New rules came into force in January 2021 that mean large corporates and LLPs must calculate their carbon emissions and report on these.  It is expected that in the future all business may need report on carbon emissions.  This has led to a trade in selling carbon credits to those looking to offset the emissions they generate.  Options for this include selling the rights to the carbon captured by newly planted trees, buying land to plant trees on, rewilding land currently used for other purposes, restoring peat bogs and many more. 

Many landowners have the valuable resources known as natural capital that can be, or already are, a part of this.  Landowners can now look at ways to maximise their natural capital and how they can monetise it which is most often through funding and grants or carbon trading.

Many of the grants available have been around for many years and the tax on these is understood.  The carbon market has also been around for many years but there is considerable uncertainty on how it is taxed and with the increase in carbon trading it is important to look carefully at the tax implications. 

When farmers or landowners are receiving income from natural capital resources, the first question is whether the consideration received will be seen as capital and taxed to capital gains tax for which the rates are 10% and 20% or if it will be seen as revenue income and taxed either to income tax where the income tax rates range from 19% to 46% in Scotland.  Where the asset is held in a company rather than a partnership or held personally by an individual, it will be taxable to corporation tax in the company.

To determine whether it will be income or capital treatment, it is important to look at the wording of the contracts involved but as a general guide, where there is a one off payment and where the original owner no longer as control over the asset, it is likely to be capital gains tax that applies.  Where there is more than one payment especially where it will be a regular income, it is more likely that it will be treated as income and taxed either to income tax if held personally or in a partnership or trust. If it is to be treated as income and held in a company, it will be subject to corporation tax. 

Where is can be established that income treatment will apply, it is then necessary to consider whether it will be trading income or if it is seen as being a by product of the land ownership, it will be seen as non trading income, most likely land and property income.  While these are both taxed at broadly the same rates for both income tax and corporation tax, the reliefs that apply differ as do the options for offsetting any losses that arise.  In addition to the tax that applies to the income, whether it is trading income or non trading income will also affect the reliefs and tax rates that apply to any future disposals for capital gains tax and to the inheritance tax position so vital that it is determined at the start, how the income will be treated. 

The income from natural capital very often fall into the income treatment as non trade income taxable on the land and property pages of the tax return.  Where this is the case, any future disposal of the asset is unlikely to qualify for capital gains tax reliefs that apply to disposals of business assets such as business asset disposal relief.  It also means that it will alter the balance between trading and non trading assets when considering business property relief and agricultural relief for inheritance tax and possibly restrict the availability of these reliefs.

As the world takes more if an interest in the carbon markets and there is increased value, it is vital to take good advice on how any projects you are considering will be taxed both initially and over the longer term.


Game Fair 2021

The Henderson Loggie Agricultural & Rural Business team had an enjoyable day out that the Scottish Game Fair in September 2021. It was great to meet up with clients, contacts, and colleagues in person again and hear more about the issues and opportunities in the sector. Here are some of our highlights from the day.


P&J Farming Breakfast

Our very own Lucy Crow was invited to speak at the P&J Farming breakfast webinar where she discussed the tax on natural capital as part of their planning for the future webinar. You can watch the recording of the webinar below.


Get in touch

Lucy Crow

Lucy Crow

I am Chartered Tax Advisor qualified and have worked in tax for over 12 years, specialising in personal tax.  I work with a wide range of personal tax clients, from small sole traders to high…
Susan Pattison

Susan Pattison

I joined Henderson Loggie in 2014 and completed the Graduate Programme in the firm’s audit and accounts department. I qualified as a Chartered Accountant (CA) in 2017 before joining the firm’s tax department. I completed…
Dawn MacDougall

Dawn MacDougall

I was previously head of tax in EY’s Inverness office where I worked with owner-managed businesses and landed estates throughout the UK. I qualified as a Chartered Accountant in EY’s Edinburgh office and before re-joining…