Biodiversity Net Gain: The Tax Treatment Developers and Landowners Need to Know

Every planning consent granted since February 2024 now comes with a biodiversity condition attached, and most schemes are meeting it by buying units rather than rewilding the site itself. The planning mechanics get plenty of coverage. The tax treatment of what a developer pays out, and what a landowner running a habitat bank receives, gets almost none — and HMRC's own guidance is still thin on the ground.

What the biodiversity net gain requirement actually is

Under the Environment Act 2021, most planning permissions in England must now deliver a measurable 10% increase in biodiversity value, calculated using the statutory biodiversity metric and compared against the pre-development baseline. The requirement became mandatory for major developments from 12 February 2024 and extended to small sites from 2 April 2024. Developers meet it through a hierarchy: on-site habitat creation or enhancement first, off-site biodiversity units bought from a registered habitat bank second, and statutory biodiversity credits bought from the government as a last resort at a deliberately unattractive price. Whichever route is used, the gain has to be secured for at least 30 years through a planning obligation or a conservation covenant, and off-site units have to be registered on the biodiversity gain sites register run by Natural England before they can be counted against a permission.

How the cost is treated for the developer

HMRC has not published BNG-specific guidance on the direct tax treatment of these costs, but there is little reason to expect it to sit outside the established pattern for other planning obligation spend such as Section 106 contributions and the Community Infrastructure Levy. For a developer trading in the property as stock, the cost of securing the necessary biodiversity units is a cost of bringing the development to a saleable state, added to the value of work in progress and relieved against profit when the units are sold, not deducted upfront. For an investor holding the completed development, the same cost is added to the base cost of the asset for Capital Gains Tax on eventual disposal. Where the arrangement involves an ongoing 30-year monitoring and management fee rather than a single upfront unit price, part of that cost may need to be treated as a cost of the ongoing trade or investment activity rather than added wholesale to the cost of the original development — the drafting of the habitat bank agreement matters as much as the headline price.

Why HMRC treats the sale of a biodiversity unit as standard-rated for VAT

HMRC set out its position in Revenue and Customs Brief 8 (2024): the sale of a biodiversity unit is normally standard-rated at 20%, not exempt. The reasoning turns on what is actually being supplied. An exempt supply of land requires the grant of an interest in, right over, or licence to occupy land. A habitat bank operator selling a biodiversity unit typically retains full ownership and possession of the land and simply commits, under a conservation covenant or planning obligation, to creating and maintaining habitat on it for 30 years. What the developer buys is closer to a service — a contractual commitment and a credit against the biodiversity metric — than an interest in the land itself, and HMRC's brief treats it accordingly. That means a developer buying off-site units should expect a VAT charge on top of the unit price, recoverable as input tax in the normal way where the development it supports is a taxable business activity, and a habitat bank operator selling units needs to be VAT-registered and accounting for output tax on sales in exactly the same way as any other taxable supplier.

The other side of the deal: taxing the habitat bank operator

For a farmer or landowner setting up a habitat bank to sell units, the direct tax position follows on from HMRC's VAT characterisation, even though HMRC has not confirmed it in the same terms for income tax and Corporation Tax purposes. If the sale of a unit is a supply of a service rather than a disposal of an interest in land, the income from it looks more like trading or miscellaneous income than a capital receipt, particularly where the operator is actively running an ongoing habitat management business rather than making a one-off disposal. That has knock-on effects worth flagging early rather than after the first tax return is filed: trading income doesn't get the CGT annual exempt amount or any capital loss offset, and a landowner who also farms the wider holding will want to think about how habitat bank income interacts with existing sole trade or partnership accounts. There is a separate question, largely untested, of what a 30-year conservation covenant does to the underlying land's value for Inheritance Tax and future Capital Gains Tax purposes once part of the holding is taken out of active agricultural or development use for a generation.

What this means in practice

This is a genuinely new area of tax practice sitting on top of a genuinely new planning regime, and the direct tax guidance has not caught up with the VAT position HMRC has already published. A developer budgeting for BNG compliance should treat the unit cost as a capital cost of the development in the first instance, unless the contract structure clearly points somewhere else, and should not assume the price quoted by a habitat bank includes VAT until that has been confirmed in writing. A landowner considering setting up a habitat bank should get the income tax position modelled against their existing farming or investment activities before signing a 30-year commitment, not after the first unit sale has already gone through.

Common questions

Is Biodiversity Net Gain now mandatory for all developments?

BNG became mandatory under the Environment Act 2021 for most major developments in England from 12 February 2024 and for small sites from 2 April 2024, requiring at least a 10% measurable increase in biodiversity value using the statutory metric. Some development types are exempt or subject to bespoke arrangements, including householder applications, biodiversity gain sites themselves, and certain nationally significant infrastructure projects on a different transitional timetable, so exemption status needs checking site by site rather than assumed.

How is the cost of buying biodiversity units treated for tax purposes?

There is no BNG-specific HMRC guidance on this point, but the cost sits squarely within the established treatment for other planning obligation costs such as Section 106 contributions and the Community Infrastructure Levy: for a trading developer it is a cost of the development added to the value of trading stock and relieved against profit on sale, and for an investor it is added to the base cost of the asset for Capital Gains Tax. The 30-year management and monitoring commitment behind an off-site unit purchase can mean part of the cost is spread rather than deducted in a single year, depending on how the contract is structured.

Is VAT charged on the sale of biodiversity units?

HMRC confirmed in Revenue and Customs Brief 8 (2024) that the sale of biodiversity units is normally standard-rated. Its reasoning is that a habitat bank operator selling units is not granting an exempt interest in or licence to occupy land, since the seller keeps the land and simply commits to creating and maintaining habitat under a conservation covenant or planning obligation, so the exempt-land-supply treatment does not apply and VAT is due on the purchase price.

How is income from selling biodiversity units to developers taxed for a landowner?

Because HMRC treats the sale of a biodiversity unit as a supply of services rather than a disposal of an interest in land, income from selling units is generally expected to be taxed as trading or miscellaneous income rather than as a capital gain, particularly where the landowner runs the habitat bank as an ongoing activity involving monitoring and management commitments over the 30-year period. This is a developing area with limited HMRC guidance and no settled case law, so the position should be reviewed against the specific habitat bank agreement rather than assumed.

This article is general information, not personal tax or legal advice, and the rules referred to can change. Your own position depends on facts we cannot see from here — please take advice before acting on anything above.

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