Environmental schemes, inheritance tax and succession planning for rural estates
For many farms and estates, wildlife management and habitat enhancement are nothing new. Long before biodiversity net gain (BNG), carbon markets and ecosystem services became part of the rural vocabulary, landowners were managing woodlands, wetlands, grassland, game habitats and other environmental assets as part of responsible estate stewardship.
What has changed is that activities which many farms and estates were already undertaking for wildlife, habitat management and wider stewardship purposes are increasingly capable of generating income in their own right. BNG, nutrient neutrality, carbon projects and other environmental schemes are creating commercial opportunities that simply did not exist a few years ago.
The scale of activity is already considerable. More than 50 Landscape Recovery projects have been reported as having been developed across England, covering approximately 240,000 hectares. At the same time, wildlife and habitat management schemes continue to expand across both farms and larger estates.
Against that backdrop, environmental schemes are increasingly becoming part of a much wider discussion about estate resilience, inheritance tax (IHT) and succession planning.
A changing IHT landscape
The restrictions to Agricultural Property Relief (APR) and Business Property Relief (BPR) from 6 April 2026 have led many farming and landed estate families to revisit long-established succession plans. For some, the changes have raised questions about how future IHT liabilities will be funded without selling land or weakening the underlying business.
The debate is often framed as a tax issue, but in reality it is much wider than that. Succession planning is fundamentally about ensuring that a business remains viable and that ownership can pass successfully between generations.
Many farms and estates are therefore considering how environmental schemes might contribute to that objective. The attraction is obvious. Environmental projects may generate long-term income without requiring the underlying land to be sold.
In the right circumstances, that income may help support future IHT liabilities, fund capital expenditure or provide for family members who are not directly involved in the core business. Taken together, these factors are increasing pressure on cash flow and making long-term sources of income more attractive than they may previously have been.
Greater tax certainty
One of the difficulties with environmental schemes has been uncertainty over their tax treatment.
HMRC’s publication of its Technical Note on Ecosystem Services in May 2026 has provided welcome clarity. The guidance addresses biodiversity net gain, nutrient neutrality, woodland carbon and peatland schemes and explains HMRC’s approach to their taxation.
Perhaps the most interesting aspect of the guidance is HMRC’s recognition that environmental income will often arise within the context of a wider rural business. In many cases, receipts may be treated as trading income rather than passive investment returns, although the precise treatment will depend on how the arrangement is structured. Until then, there had been significant uncertainty, making it difficult for farms and estates to plan with confidence.
This is highly relevant to the ability to claim BPR, which applies only to businesses that are wholly or mainly trading. Prior to the guidance, many landowners were concerned that replacing farming income with environmental income might weaken claims for BPR by making the business appear more investment-based in nature, with dire IHT consequences.
The guidance also confirms that receipts will generally be treated as income rather than capital and so potentially subject to higher rates of income tax than capital gains, save in more limited situations where a payment genuinely represents compensation for the permanent sterilisation of land.
Importantly, the extension of APR to certain qualifying environmental management agreements has also reduced concerns that participation in environmental schemes might automatically jeopardise IHT relief.
Thinking beyond income
While much attention has focused on the potential financial returns, the more interesting question is often whether a scheme aligns with the long-term objectives of the estate or farm.
Many environmental agreements involve commitments lasting decades. Statutory off-site BNG gains must generally be maintained for at least 30 years and some schemes may have an even longer horizon. That means these projects should be viewed not simply as income-generating opportunities but as succession-planning decisions.
Families should therefore consider:
- Whether future generations will welcome the restrictions being imposed on land use.
- Whether flexibility is being surrendered.
- Whether alternative opportunities are being given up.
- How environmental income will be shared.
- Whether existing trusts, partnerships or governance structures remain appropriate.
For many farms and estates, the real value of environmental schemes may lie not in the headline payment, but in their ability to strengthen the long-term resilience of the business while supporting wildlife and environmental objectives that are already central to the farm’s or estate’s identity.
Looking ahead
The most successful farms and estates have always taken a long-term view. Wildlife management, habitat enhancement and environmental stewardship frequently involve timescales that extend well beyond a single generation. Environmental markets are no different.
The most successful projects are unlikely to be those that simply generate the largest environmental payment. Instead, they will be the projects that enhance wildlife and habitats, support the wider business, preserve flexibility where possible and sit comfortably within the family’s long-term succession plans.
For many farms and estates, environmental schemes are no longer simply about conservation. Increasingly, they are becoming part of the broader conversation about how land, businesses and stewardship responsibilities are passed to the next generation.
What this means in practice
Before entering an environmental scheme, landowners should consider how the arrangement supports the estate’s long-term objectives, succession plans and future flexibility. Environmental income can be attractive, but the most successful projects are often those that complement the wider business and stewardship ambitions of the estate.
