What is Biodiversity Net Gain (BNG)?

Development often results in impacts on, and losses of, nature. The Environment Act 2021 introduces the requirement for biodiversity net gain for developments in England. The Act is also echoed in the National Planning Policy Framework (NPPF) to leave biodiversity in a measurably better state than before the development took place.

Biodiversity net gain is in addition to existing habitat and species protections. Biodiversity net gain aims to create new habitats as well as enhancing existing habitats providing an uplift of at least 10% BNG compared to the baseline on commencement of the development.

What is a BNG Unit?

BNG is measured using the Natural England and DEFRA Biodiversity Metric (now 3.1), this establishes a biodiversity value based on habitat features creating a BNG Unit by assigning each habitat on site a biodiversity unit value.

The Metric enables a comparison of the habitat found on a site before and after development. Four factors underpin this comparison: habitat size; condition; distinctiveness; and strategic significance (location).

Mechanisms for BNG Delivery

In order of preference:

• On-site units – delivered through habitat creation/enhancement via landscaping/green infrastructure.
• Off-site units - delivered through habitat creation/enhancement including habitat banks, with public and private landowners.
• Statutory Credits – delivered through large scale habitat projects delivering high value habitats which can also provide long term nature-based solutions (credits will be made available for purchase in future and are intended as last resort if 1 and 2 above are unachievable).

The Metric considers the distance of the off-site BNG from the development, the greater the distance from the development, the lower the deemed value of the habitat.

What is a Habitat Bank?

Habitat Banks are sites where habitat is created in advance of need and are secured and managed long term (habitat sites will be on a biodiversity gain register likely to be administered by Natural England). Habitat Banks offers developers the opportunity to purchase off-site BNG Units to be compliant with the Environment Act and NPPF.

Habitat Banks have also been of interest to investors wishing to create a portfolio of Habitat Banks.

The demand for BNG Units?

DEFRA, as part of their consultation on BNG, has published a market analysis that uses a working assumption that 50% of biodiversity net gain would be delivered off-site which creates an annual demand of 6,200 biodiversity units with an estimated value of £135,000,000 (National Average of £21,774/BNG Unit). This indicates the size of the potential habitat banking market.

Key Points from a developer’s perspective:

• Biodiversity net gain is mandatory as part of the Environment Bill.
• BNG applied to all development projects; residential, commercial and infrastructure, with very few exceptions.
• A Biodiversity Gain Plan will be required and need approving before the commencement of any development and will apply to new planning applications submitted after November 2023 (some local authorities are applying the rule now under the NPPF)
• It could be a challenge for developers to achieve on site mitigation with biodiversity often limited and impractical due to the value and limited space of development land.
• Potential challenge to developers being liable to monitor and report the onsite BNG Units for next 30 years – potentially even if site sold.
• Off-site BNG Units offer convenient and practical solution for developers to offset required credits and avoid timely delays in gaining planning consent.
• Habitat Banks could offer turnkey solutions to developers to deliver the required 10% gain in BNG Units and provide the ongoing monitoring, management and reporting in line within an agreed management plan.
• Initially, there could be a market shortage of BNG Units as the new legislations grabs hold.

Key points from a landowner’s perspective:

• Opportunity to diversify supplying BNG Units
• Potential diversification of marginal land.
• Undertake a baseline assessment of their land using the Biodiversity Metric.
• Depending on agreements payments could be paid in a lump sum, once regulator certified BNG Units in place or there can be annual payments from an agreed plan which considers management activities, infrastructure maintenance, and some income forgone.
• Some farming activities may be able to continue – annual forage/hay crop at an agreed time or a period of agreed grazing as part of the habitat management.
• Contracted to provide the habitat management plan (annual maintenance).
• Landowner retains ownership of the land, with a conservation covenant registered with the land and failure to deliver BNG can result in enforcement action.
• In principle a minimum of a 30-year lease is required after the completion of the habitat enhancement works, this time frame could be required to be extended under the Environment Act.
• The landowner can form a Joint Venture with a relevant broker (investor in nature) who often facilitates the agreement with a developer or habitat bank. This releases the developer from BNG conditions and landowner from the creation, monitoring and reporting obligations.
• Fees associated with BNG site might include an ecological survey, an off-site biodiversity management plan, legal fees in terms of a lease and conservation covenant. After the cost of creation there will be the ongoing monitoring and reporting.
• Possibility of stacking income from the BNG site with other schemes for example selling carbon credits for CO2 sequestration, phosphate, or nitrogen credits.
• Possibility to create environments that have synergy with other diversification projects for example glamping, especially where owners with a long-term view may be willing to commit land as a BNG site in perpetuity.
• Beware of Environmental Impact Assessment legislation at the end of a 30-year agreement of land potentially wanting to be converted from a BNG offset site back to agricultural land.
• Some national housebuilders are securing or retaining land with no direct development potential to act as BNG offset sites.

Key Points from an advisor’s perspective:

• 30 years is a long time careful consideration needs to be taken on the impact of the remaining business. Consideration should be given for payments to be index linked to RPI.
• Consider effect on capital value of land in part and as a whole of the holding for example it could impact the value when providing security to lenders.
• Income Tax implications – varying contracts, wording and interpretation will determine whether the income is taxed in a single year or duration of contract; as income or capital; farming or non-farming; and trading income or rent.
• Capital Tax Implications – land occupied for agricultural purposes and used within the business will qualify for numerous Capital Gains Tax (CGT) and Inheritance Tax (IHT) reliefs.

If land is no longer occupied for the use of agriculture or within a trade certain advantageous capital tax reliefs could be lost. If a substantial proportion of land is leased this could affect the IHT reliefs on the remaining assets used with in a business and the farmhouse.

Woodland needs to be managed on a commercial basis to qualify for Business Property Relief (unless occupied with and ancillary to agricultural land, it qualifies for Agricultural Property Relief). If only for amenity or biodiversity use relief will not qualify.

Lastly, large cash sums in advance could give rise to substantial inheritance tax liabilities.

Conclusion

Nothing is ever quite as easy as one, two, three but with careful consideration of the opportunities within an embryonic market, a BNG site could sit in harmony as part of the business ecosystem.

As ever, appropriate planning and review of business structures may be required to minimise tax and facilitate succession of the business.

Finally, having drafted this article, the political and economic landscape has changed somewhat highlighting the importance to be ever aware of the external factors that could influence the above possibilities and opportunities.

Proceed with your eyes wide open and look for the positives and different opportunities in an ever changing landscape – it will not be for everyone!

Written by Mark Seager FCCA

Mark Seager FCCA

Director

Mark previously worked alongside one of our directors, Dan Knight and our Senior Tax Manager, Victoria Paley at a regional practice. Mark brings along a wealth of experience in both accountancy and rural life having grown up helping on his family farm with both the practical side and the VAT returns from an early age. His passion for agriculture, interest in business and desire to help others grew after he graduated from Harper Adams University.

Mark specialises in business strategy, structure and tax planning with agriculture.

T: 01823462908

E: mark.seager@evolutionabs.co.uk