Renewables impact for tax

There are still a lot of renewable developments happening on farms.

In this article I focus on the tax implications of contracts where a farming business leases out land to a third party for large scale energy generation.

Over the last few years contracts with third party energy providers have become longer in length. For example, contracts leasing out land for solar were originally for about 25 years, sometimes with options to extend the time period. Now it is common for these contracts to be for 40 years and longer. Therefore, it is imperative to think long about the impact of leasing out land for renewables.

Income from the lease will generally follow ownership of the land. If the land is owned personally, then the income will be subject to income tax. Once you earn more than £50,270 then you will be paying higher rates of tax (40% or more) and, if applicable, may also lose any child benefit if you qualify for it.

It may make sense to spread the land ownership out amongst other family members to reduce the amount of income taxed at higher rates.

One other method of keeping income tax down is to use a limited company. If the land is owned by a limited company, then the tax payable on the income ranges from 19% to 25%, and this can save you money. You do have to consider how to get the money back out of the company, however, this can be an effective way of managing the income from a renewables project.

IHT is potentially payable by an individual after their death. Farmland is generally IHT free as it often gets one of two reliefs: agricultural property relief and business property relief. If farmland is leased out for, say a solar farm, then these reliefs no longer apply and so it can be chargeable to IHT. This is the case even if you are contracted to keep the land around the solar park tidy.

The land may also have increased in value so there is a double impact. For example, one acre of land which you farm worth £8,000 per acre would be IHT free. However, if the same acre is leased out for solar, it might now be worth £25,000 and the potential IHT is £10,000 per acre.

If the income from the solar is £1,200 per acre, then after tax it can take up to 14 years of income from the land to pay off the inheritance tax liability.

So, what should you do if a renewables development comes knocking at your door?

Firstly, do embrace the opportunity. For most farmers the ability to lease out land for £1,000 per acre plus is welcome. There are occasions when the income comes at too much of a cost for the rest of the farming business so bear that in mind.

Secondly, start thinking really long term. Who should share in the capital value of the land and the income from this for the next 40 plus years?

Finally, think about the tax implications. Farmland can currently be gifted to others tax free. Land leased out for solar is much more difficult to gift tax free. Therefore, making decisions about income and land ownership before the lease is in place is crucial.