Born To Be Filed: Delving Into Tax And Conservation Covenants

• Published date: 16 August 2023
• Subject Matter: Environment, Tax, Environmental Law, Inheritance Tax, Capital Gains Tax, Sales Taxes: VAT, GST
• Law Firm: Macfarlanes
• Author: Henry Vane and Rebecca Rose

Henry Vane and Rebecca Rose dig into the tax treatment of conservation covenants for investors, landowners and?responsible bodies.

This article first appeared in the August 2023 issue of Estates Gazette.

There is considerable excitement in the environmental and investment worlds around the potential of conservation covenants (CCs) - a legal innovation that could unlock green finance and effectively channel capital from the City to the countryside. However, this enthusiasm will count for little if CCs don't make both financial and environmental sense. This inevitably brings us sharply back from squelchy peat bogs and soaring butterfly meadows to tax. After the Government finally opened the application process to be a responsible body to enforce CCs on 27 July, now is a good time to explore the tax questions that will determine whether CCs flourish and make England and Wales their home, or end up as a forgotten legal specimen in a dusty glass case.

As outlined previously in "Conservation covenants for investors", we see CCs alongside natural capital agreements (NCAs) for environmental services and part of a triangle between landowner, responsible body and investor. The focus of this article is on the tax implications for each of the three parties - investors, responsible bodies and landowners.

A conservation covenant recap

Introduced into law by the Environment Act 2021, CCs are the most radical land law innovation in a generation. They are voluntary agreements (either indefinite or time-limited) between a landowner and a responsible body to manage land for a "conservation purpose" and for the public good.

In a tripartite arrangement such as that outlined above (and illustrated below), the CC between the landowner and the responsible body will set out the conservation purpose and bind the land, and under the linked NCA, the investor will buy environmental credits or services arising from the conservation purpose from the landowner. The investor will also enter into a funding agreement with the responsible body.

A key benefit of CCs for investors is that they do not need to buy or lease the land in question (a stamp duty land tax (SDLT) saving) to secure environmental credits (e.g. biodiversity net gain units) or satisfy other ESG commitments.

CCs have clear advantages over other forms of agreement:

• they bind land more tightly than typical covenants - successors in title will take subject to the positive as well as negative obligations and there is no need...