The ability to access agricultural property relief from inheritance tax has long been a cherished, and important, relief for farms and estates. For many, that relief, coupled with business property relief, has been the saviour of multigenerational farms and estates. The argument underpinning the reliefs being that if these businesses were to be taxed to inheritance tax on each generation it could decimate their ability to survive, and with it their ability to sustain rural communities and maintain primary production. Rural businesses are a "long play" and they need that long-term continuity to build up livestock, forestry, soil health and so on. Although fading from memory now, there were numerous historic examples of rural properties that were deserted or fragmented as a result of a succession of death taxes.

So for many years, farming and estate families have sat round farm kitchen tables, or annual trustees' board rooms, and listened to advisers sit back in their chairs and pronounce that inheritance tax should not trouble them too much because of these reliefs. Inevitably discussion might turn to a few assets that might sit outside of these reliefs such as that piece of development land, that holiday let, or the elephant test of whether the house was too grand to be a farmhouse. With a bit of careful planning most of these assets could quite legitimately be steered through to the next generation and so the cycle of rural life goes on.

The problem now, and why families with rural assets should not sit back in their chairs, is that these reliefs were designed around a version of agriculture and land use which is now rapidly changing. Back in the day – farming was farming – a farmhouse looked and felt like one – and any non-traditional farm or estate income was generally confined to a relatively modest contribution on the fringes. That is now changing and with it there is a risk of these reliefs falling out of step.

In recent years there has been a massive growth in renewable energy projects, and farms and estates have been well placed to benefit from these. For those businesses that have participated it has provided a huge injection of welcome revenue, often transforming the commercial viability of the business in question. In many cases these projects have been structured as a lease, either to a commercial operator or a company connected to the landowner. But in so doing this structure has converted land that was once eligible for agricultural property relief or business property relief to an investment asset, and thus potentially back into the inheritance tax net.

The consequence of this may be not only to disqualify the value of the let land from IHT relief, but to disqualify the overall farm or estate business from at least business property relief also. This is because businesses which have a mix of investment and non-investment activities are judged in the round, involving consideration of their investment and non-investment activities on a variety of factors. The rules are complex but include capital value, turnover and profit; and it is easy to see that the receipt of considerable rent may tip the balance towards investment.

Generally, with a bit of forethought and planning these projects could be ringfenced and the relief on the remaining asset protected. However, the position is now becoming more uncertain in relation to natural capital and environmental use. And here's the rub, landowners are being encouraged to undertake environmental activities to sequester carbon and save the planet but in so doing are they taking land out of agricultural use or potentially even converting it to an investment asset, sometimes across large swathes of land (and value) and thus out of the reliefs?

There seems little doubt that environmental measures such as the greening obligations that are integral to agricultural activity and Basic Payment System do not put the Inheritance Tax reliefs at risk. What seems less clear is the position in relation to cessation of normal agricultural production, not only for large schemes to sequester carbon, rewild or manage peatlands but also in relation to farm scale schemes which may involve long-term commitment to environmental and natural capital outcomes in place of agriculture as we know it. There is as yet no statutory clarification nor case law to guide us. The position in relation to capital gains tax also requires to be considered, and whether the asset remains a trading asset.

The question for the sector and for policy makers, is that at a time when land use is in transition to net zero, should these reliefs be clarified or indeed if necessary extended to include these new activities? Or does the public purse have a legitimate expectation that these be denied reliefs and taxed, given the potentially substantial benefits the participants may derive? One thing is for sure, that for farmers and landowners considering these natural capital opportunities, whether driven by commercial opportunity or environmental responsibility, the potential impact and risk on capital taxes should be carefully factored in.

We are very much in a time of change in land use, with the latest land reform consultation in Scotland having just closed and the agricultural policy consultation also underway, both of which impact on how land is used and may well extend environmental support schemes. If these reforms are not matched with appropriate reliefs there may be a risk that the tension with potential loss of tax relief may deter landowners from fully embracing some of the opportunities that natural capital development and biodiversity net gain may present to both pocket and planet.