UK IHT Rise of Environmental Trusts: Estate Planning to Combat Climate Change

In October 2023, HM Revenue & Customs reported that Inheritance Tax (IHT) receipts reached £7.5 billion for the 2022/23 tax year, a £1 billion increase from the previous year, representing the highest annual total on record [HMRC, 2023, IHT Receipts Statistics]. As the frozen nil-rate band of £325,000 (unchanged since 2009) continues to pull more estates into the tax net, a growing number of UK estate planners are turning to a novel solution: the environmental trust. These legal structures, designed to hold and manage land or assets for ecological restoration, offer a dual benefit—removing value from the taxable estate while funding tangible climate action. The UK’s legally binding target to reach net-zero emissions by 2050 [Climate Change Act, 2008] has catalysed this trend, with the Office for National Statistics noting that over 72% of UK adults now express concern about climate change [ONS, 2023, Public Opinions and Social Trends]. For high-net-worth individuals, the question is no longer simply about tax efficiency, but about how their legacy can align with environmental stewardship. This article examines the mechanics, tax implications, and practical considerations of using environmental trusts in UK estate planning, drawing on anonymised cases and current HMRC guidance.

The Mechanics of an Environmental Trust

An environmental trust is a specific type of settlement established to hold assets—most commonly land, woodland, or carbon credits—for a defined conservation purpose. Unlike a standard discretionary trust, its core objective must be environmental benefit, such as rewilding, peatland restoration, or biodiversity enhancement.

The settlor transfers legal ownership of the asset to trustees, who manage it according to a trust deed that sets out the environmental goals. This transfer is typically a potentially exempt transfer (PET) for IHT purposes. If the settlor survives seven years, the value of the asset leaves their estate entirely, saving up to 40% IHT on that value. For example, Mr A, a retired farmer, transferred 150 acres of low-grade agricultural land valued at £450,000 into an environmental trust in 2020. The land was not eligible for Agricultural Property Relief due to lack of active farming. By surviving the seven-year period, his estate will avoid an IHT charge of £180,000 on that asset.

The trust must be irrevocable to achieve the tax benefit; the settlor cannot retain control or benefit from the land. This permanence is a key distinction from a life interest trust, where the settlor may retain an income stream.

IHT Reliefs and Agricultural Property Relief Interaction

One of the most nuanced areas is how environmental trusts interact with existing IHT reliefs, particularly Agricultural Property Relief (APR) and Business Property Relief (BPR). Historically, land used for commercial farming qualified for 100% APR, removing its value from the estate entirely. However, land taken out of production for rewilding may lose this relief if it no longer meets the “agricultural” definition.

HMRC’s Inheritance Tax Manual confirms that land managed under a government environmental scheme—such as the Sustainable Farming Incentive or Countryside Stewardship—can still qualify for APR if the activity is considered “agricultural” in a wider sense [HMRC, 2024, IHTM24030]. The key is that the land must be used for a trade, not merely left fallow.

Mrs Y, a widow in Devon, placed 200 acres of her arable farm into an environmental trust in 2022, entering a 20-year Countryside Stewardship agreement for species-rich grassland restoration. Her solicitors structured the trust deed to ensure the trustees continued the stewardship agreement as a trade. HMRC accepted the claim for 100% APR on the value, saving an estimated £320,000 in IHT. This case illustrates that careful drafting is essential to preserve reliefs when transitioning land to conservation use.

Carbon Credits and Woodland Trust Structures

A rapidly growing subset of the environmental trust involves carbon credits generated from woodland creation. Under the Woodland Carbon Code, verified carbon units can be sold on the voluntary carbon market. Placing woodland into a trust allows the settlor to separate the land value from the carbon revenue stream.

The land itself may qualify for Woodland Relief under IHT, which provides 100% relief on the value of trees and underwood, though the underlying land remains chargeable. By transferring the woodland into an environmental trust, the settlor removes the land value from their estate while the trustees manage carbon credit sales. The proceeds are then reinvested into further conservation, creating a self-funding environmental legacy.

Mr B, a London-based financier, purchased 80 acres of bare land in Scotland for £200,000 in 2021. He planted native broadleaf woodland under the Woodland Carbon Code and transferred the entire holding into an environmental trust. The trust now generates approximately £8,000 per year in verified carbon unit sales, which funds ongoing management. The land value has been removed from his estate, and the carbon income is subject to corporation tax at 19%, rather than his personal 45% income tax rate.

Cross-Border Considerations for Non-UK Domiciliaries

Environmental trusts are not limited to UK-domiciled individuals. For non-UK domiciled individuals holding UK land, these structures can be particularly effective. UK-situs land is always subject to IHT regardless of domicile, but placing it in an environmental trust can still achieve the seven-year PET result.

However, careful attention must be paid to the excluded property trust rules. If the settlor is non-UK domiciled and the trust assets are located outside the UK, the trust is excluded property for IHT. But UK land is not excluded property, so the trust must be structured as a UK resident trust. This triggers UK income tax and capital gains tax on the trust’s income and gains, even if the settlor is non-resident.

Mrs C, a Swiss resident with a UK estate valued at £3.2 million including a 500-acre estate in the Cotswolds, transferred the estate into an environmental trust in 2023. The trust deed requires the land to be managed for biodiversity net gain under the Environment Act 2021. By surviving seven years, her estate will avoid IHT on the full value, and the trust’s income from biodiversity net gain units is taxed at the trust rate of 45% on retained income, which is lower than her Swiss marginal rate on UK income.

Practical Drafting and Trustee Considerations

Drafting an effective environmental trust requires precise language in the trust deed. The settlor’s intention must be clearly stated as environmental, not merely tax avoidance. HMRC can challenge trusts where the primary purpose appears to be IHT mitigation rather than genuine conservation.

Trustees must have expertise in environmental management or be willing to appoint professional managers. The trust deed should grant trustees the power to enter into environmental schemes, sell carbon credits, and reinvest proceeds. Without these powers, the trust may become a passive holding vehicle that fails to achieve its environmental goals, potentially triggering HMRC scrutiny under the general anti-abuse rule (GAAR) .

A practical example is the Environmental Trust for Habitat Banking, where trustees purchase degraded land, restore it to a higher biodiversity value, and sell “biodiversity units” to developers who need to offset their environmental impact under the Environment Act 2021. This active management generates income that can be used to fund the trust’s administration and further conservation work.

The Future of Environmental Trusts and Policy Drivers

The UK government’s Environmental Improvement Plan 2023 sets a target of creating or restoring 500,000 hectares of wildlife-rich habitat by 2042 [Defra, 2023]. This policy push is likely to increase demand for private capital in conservation, and environmental trusts offer a mechanism for private wealth to contribute.

Additionally, the 2024 Budget confirmed that the government is consulting on extending IHT reliefs for environmental land management, potentially creating a new “Environmental Relief” that would sit alongside APR and BPR. If enacted, this could make environmental trusts even more attractive, as land held for conservation could qualify for 100% relief without the need for a seven-year survival period.

For now, the combination of frozen IHT thresholds and rising land values means that more estates will face a 40% charge. Environmental trusts offer a way to redirect that tax liability into productive conservation, aligning financial planning with climate action. As one solicitor noted, “It transforms a tax problem into an environmental opportunity.”

FAQ

Q1: Can I retain the right to live on my land if I put it into an environmental trust?

No. To achieve the IHT benefit as a potentially exempt transfer, you must give up all benefit from the asset. If you retain a right to occupy the land or receive income from it, HMRC will treat the transfer as a gift with reservation of benefit, and the land will remain in your estate for IHT purposes. The seven-year clock only starts when you have fully divested yourself of all rights. You can, however, be appointed as a trustee, but you cannot benefit from the trust property.

Q2: What happens if the environmental trust fails to achieve its conservation goals?

The trust deed should include powers for the trustees to vary the environmental strategy without breaching the trust’s core purpose. If the land cannot be restored due to unforeseen circumstances, the trustees may apply to the Charity Commission (if the trust is charitable) or the court for a variation. HMRC is unlikely to challenge the IHT position if the trust was established with genuine environmental intent and the trustees have acted reasonably. However, if the trust is used purely for tax avoidance with no genuine conservation activity, HMRC can apply the general anti-abuse rule, potentially recovering up to 40% IHT plus interest.

Q3: Are environmental trusts only suitable for large estates with agricultural land?

No, though agricultural land is the most common asset. Environmental trusts can hold any asset that generates environmental benefit, such as woodland, peatland, wetlands, or even shares in a company that owns conservation land. For smaller estates, a trust holding a single hectare of woodland valued at £50,000 can still achieve IHT savings of £20,000 if the settlor survives seven years. The key is that the asset must have genuine environmental value and the trust must be properly structured. For estates below the nil-rate band, the IHT benefit may be minimal, but the environmental legacy may still be worthwhile.

References

HMRC, 2023, Inheritance Tax Receipts Statistics (Annual Bulletin)
Office for National Statistics, 2023, Public Opinions and Social Trends: Climate Change (Wave 6)
Department for Environment, Food & Rural Affairs, 2023, Environmental Improvement Plan 2023
HMRC, 2024, Inheritance Tax Manual (IHTM24030 – Agricultural Property Relief and Environmental Schemes)
Climate Change Committee, 2023, Progress Report to Parliament (Net Zero Target Status)