How the rural sector can breathe life into green recovery

Scotland’s farms are ripe for low-carbon practices while woodland is both a climate-friendly and tax-efficient investment.

21 August 2020

The Intergovernmental Panel on Climate Change’s recent report on climate change and land use called for a reduction in the consumption of red meat and dairy products. It argued that producing meat and dairy products in an unsustainable way has a highly damaging impact on the environment, increases carbon dioxide and methane emissions and directly contributes to climate change. This research was taken by many commentators as concluding that all red meat and dairy production had these adverse effects, much to the frustration of Scottish farmers, who, in my experience, take their environmental responsibilities very seriously. Amid hopes of a green recovery from the COVID-19 lockdown, scrutiny of agricultural practices will likely only increase.

Scotland’s farmers are directly affected by the impact of climate change and are constantly adopting practical, workable solutions and improvements to minimise their environmental impact. Between 1990 and 2017, for example, Scottish agriculture reduced its net greenhouse gas emissions by 29%.

It clearly makes no sense from a climate change perspective to cut down tropical rainforests to create grasslands to rear livestock. Likewise, producing beef in intensive systems involving little or no grazing is difficult to defend. There is a need globally to adopt farming practices that lead to environmental improvements and sustainability. Agri-forestry and mixed farming, using extensive grass-based systems, and a shift to grass-fed livestock – moving away from unsustainable grain-fed cattle – can help to achieve this.

Scotland is ideally suited to provide red meat production in an environmentally sustainable manner. Approximately 80% of Scotland’s agricultural land is not suitable for cereal, fruit or vegetable production and is best suited for use as pastureland. Scotland’s grassland also functions as a natural carbon sink. Scotland is well placed to lead from the front when it comes to sustainable agriculture – and Scottish farmers are determined to do so.

This is also recognised and supported by the Scottish Government, which earlier this year announced an initial £40 million of funding to support the industry in its move to lower carbon farming. Its Agricultural Transformation Programme will assist the sector to reduce greenhouse gas emissions and support sustainable farming and farm use, while restoring and protecting natural habitats and building sustainability through business practices that encourage productivity, innovation and inclusion. Scotland is also at the forefront of research in improving feed conversion efficiency and mitigation of methane emissions in livestock through breeding.

Likewise, the forestry industry in Scotland also has a key part to play, both in an economic recovery from the COVID-19 pandemic and in mapping a route to a greener and more sustainable future. The green recovery has, at its heart, investment in projects that are both good for the economy and the planet. Trees are a crucial natural carbon solution and, in addition to carbon capture, forestry can support a number of sectors, such as the development of co-located wind farms within existing plantations or by providing locally sourced sustainable materials for use in the housebuilding industry. There is also untapped potential in the carbon offsetting market, giving businesses the opportunity to compensate for their carbon dioxide emissions.

Despite the economic impact of the coronavirus pandemic, the forestry sector has remained buoyant. Market activity demonstrates that forestry properties are seen as a relatively ‘safe’ asset for investment during these uncertain times and while interest rates remain at a historic low.

Forestry properties have traditionally been, and remain, prime candidates for wind farm developments. As technology improves and turbines become larger or taller, it is easier to build a wind farm that is located on a forestry site using a minimum amount of forestry land. This allows landowners to continue to operate and manage a commercial forest around a windfarm, often with very little keyhole felling required.

There are many reasons why forestry properties are acknowledged as a sound investment – both long and short term, not least because of the tax benefits they offer. At the time of writing, the following tax reliefs/benefits are available in the forestry sector:

  • income tax – no income or corporation tax is payable on income generated from the sale of timber from the ownership of commercial woodlands;
  • capital gains tax (CGT) – any increase in the value of a timber crop is exempt from CGT, if it has been managed as a commercial investment;
  • rollover relief – for those who have a CGT liability arising from the sale of a business asset, the CGT liability can be deferred by investing in a qualifying asset such as timber; and
  • business asset relief – commercially managed woodland qualifies for 100% business property relief if held for two years or more. On death, there is no inheritance tax payable on the total value of the land and trees. In addition, any CGT liability that has been rolled over (as noted above) will extinguish on death.

These tax benefits, coupled with historic increases in the price of timber and the UK’s position as a net importer of timber, have all fuelled significant rises in the values of forestry property. Currently, appetite appears to be strong for forestry as an asset in both stable and turbulent times.

In a green recovery, continued investment into existing forests and plantation land will be crucial to ensure a sustainable supply of timber for construction and other industries. In the UK, the Committee on Climate Change recently recommended housing retrofitting and building climate-resilient new homes as key principles in order to rebuild a stronger and greener economy. This, combined with house-building targets, means that the construction industry requires a steady flow of timber. As has been the case in recent times, it is likely a green recovery will focus on sourcing UK timber to ensure efficiency and sustainability.

In the longer term, although the carbon efficiency of trees is undisputed, many see woodlands and forests as an untapped resource in providing a much wider benefit by offsetting the carbon produced in many other industries. While carbon offsetting arrangements are still in their infancy, they offer considerable potential, both financially and in terms of long-term sustainability.

We are actively advising landowners, charities and commercial entities on the various ways in which carbon offsetting arrangements may be implemented and facilitated, depending on their individual circumstances. There is now an opportunity for businesses to explore ways that their carbon emissions may be offset to ensure a buoyant green economic recovery from the coronavirus pandemic.

Investment in projects that benefit both the economy and the planet must be at the heart of any green recovery. Sustainability in Scotland’s agriculture and forestry industries is a central piece of the puzzle.

Hamish Lean is Head of Rural Property and Business at Shepherd and Wedderburn and Stuart Greenwood is a Partner in the rural property and business team. You can find out more about our Clean Energy Group and the contribution we and our clients are making to a green recovery here.

This article originally appeared in Insider on 21 August 2020.