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Solar Farms and Tax

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25 September 2014
Many landowners are looking at leasing land for a solar farm.  Rents of around £1,000 per acre, increasing with RPI for the next 21 years, are on offer depending on when a project will be commissioned.  This level of return can be very attractive, but with changes expected to the Government incentives this level of return may not be available for very long. 

Many landowners are currently talking to planning consultants and potential solar park developers to assess whether such a project is right for them. However, it is essential to consider the tax implications of letting land to a solar developer at an early stage, certainly before signing up to an option with the developer or before a planning application is submitted.

The main implications are that with planning, the value of the land will go up considerably and when agricultural use ceases then valuable Inheritance Tax (IHT) and Capital Gains Tax (CGT) reliefs may be lost.  It must be a good idea to ensure that the property is owned by the right individual(s) or trading entity prior to any increase in value to minimise any increased exposure to significant tax liabilities.

It may be possible for the landowner to retain the right to graze sheep around the solar panels and to claim Single Payment.  However, the developer may look to reduce the rent paid where these rights are retained.  This is a complex area and specialist advice should be sought at an early stage to see whether this is feasible and to test the attitude of possible developers.

Even more important than the tax position, is ensuring that the income stream is available to the right family members.  If the solar park rental is likely to be an important part of overall income then it would be wise to think twice before giving it away.

Inheritance Tax

The agricultural value of land that is farmed by someone generally qualifies for Agricultural Property Relief (APR) from IHT.  If land is no longer farmed, but let to a solar developer with exclusive access, then APR will be lost.  Retaining the right to graze sheep under the solar panels may mean that APR is preserved on some of the land.  However, this will only give IHT relief for the agricultural value.

IHT relief in the form of Business Property Relief (BPR) may still be available on the full value of the land if the land let to a solar developer forms part of what is one, undivided trading business, and provided rental income forms only a small part of the total income.  The business must in the round still be a trading business, typically with the majority of capital invested in business assets, the majority of turnover from farming income and ideally with the majority of profit from farming activities.

Problems may arise where the older generation own the land and where, once planning is obtained, the increased value will not qualify for 100% BPR.   It may be worth transferring the freehold down a generation before planning is obtained and the value increases.

If a transfer takes place after planning is obtained then any increase in value will form part of the Potentially Exempt Transfer (PET) by the donor and will potentially be clawed back into the donor’s estate if they die within 7 years. 

Capital Gains Tax

A gift of land that is used for agricultural purposes will usually qualify for holdover relief from CGT, either because it is farmed in hand and is a business asset, or because it qualifies for APR from IHT.  This means that it is possible to transfer land to the next generation and not to crystallise a CGT charge. 

Land let to a solar developer that is no longer used for farming will not qualify for CGT holdover relief.  Any transfers within the family must therefore take place while the land is still used for agricultural purposes.

If the land under the solar panels is still being grazed then this may preserve the right to claim other CGT reliefs on a disposal such as Entrepreneurs’ Relief on the gain arising on a sale or rollover relief where the proceeds are reinvested. However, as with holdover relief the reliefs are likely to be restricted where some of the land is not being used for grazing.

Income Tax

Rental income from a solar farm will be property income rather than part of the farm trading income.  This is not necessarily bad news as rental income does not suffer National Insurance charges, but rental income, as investment income, cannot be used to support pension contributions.

Rental income cannot be averaged as part of the farming income and if the farming enterprise on its own is regularly making losses then there may be limitations to offsetting these losses against other income.  A farm must make a profit at least once every 6 years if losses in the other years are to be offset against other income.  Even then losses that can be offset against other income are limited to the greater of £50,000 per individual or 25% of total income.

Planning Points
 
  • Consider who should benefit from the solar park rental income
  • Consider how likely the project is to go ahead and when might be the right time to start incurring potentially expensive professional fees
  • Consider whether worth trying to preserve some IHT and CGT benefits by grazing sheep under the panels
  • Consider transferring the freehold of the solar park land down a generation before planning is obtained
  • Consider retaining the freehold reversion of the solar park land within an overall trading partnership or company so that BPR preserved and some flexibility as to the allocation of income 
  • Consider the need for a written partnership agreement when dealing with these valuable assets
  • Consider leasing the land to a company and allowing that company to sub-let to the solar developer to keep income out of the highest rates of income tax

Practical Problems
 
  • If land is charged to a bank to support borrowing then it may not be possible to transfer the ownership of land quickly
  • Where land and borrowing are to be transferred and the asset and liability do not form part of a trading partnership then SDLT may be an issue
  • Consider the risks of death or divorce in, and dispute with, the younger generation