July 23, 2021

Article

After years of green incentives, there are numerous solar parks dotted around the country. While this has been great for landowners and the climate it has led to organisations wishing to buy solar parks, or the tenants wishing to purchase the freehold of the solar park, to benefit from the same rents.

Farmers are often told, usually by the potential purchaser, that, as the land has been farmed, you can roll over the gain into new farmland. However, this is not the case, as, for this relief to apply, the land must be farmed at the point of sale.

Selling a solar park can be expensive - a solar park that is rented out is an investment asset so there is very little relief from capital gains tax. Further gains can be significant, as often farmland has been in the family for numerous years and any base cost would be insignificant compared to the value today.

If we were to take a 100-acre solar park with a rent of £1,000 an acre, if the rent is indexed linked to inflation, the value of the land might be the rent multiplied by the number of years remaining, and then discounted. For example, if we have 25-years left of a 30-year lease, the value might be approximately £2.5million.

If this land had been farmed since 1982 by the same people, then the base cost might be approximately £125,000. Even if it were bought more recently, when farmland was £10,000 an acre, the base cost is only £1million.

Therefore, there is going to be a substantial gain on the sale of the land. With a 1982 base cost, there would be a gain of £2.375million. Without rollover relief the capital gains tax (CGT), whilst still only 20%, would be £475,000, this could be cheaper than retaining the land.

If the value of the land is effectively the sum of the rent you will receive, depending on your other income, you could

pay more tax in the form of income tax by retaining the land. Assuming the land is partnership property with three partners, the farm making £100,000 profit each year. With the addition of the rent from the solar park, the three partners would have some higher rate tax to pay. Especially with the rents being indexed linked and with the basic rate bands being frozen for the next five years, this could lead to more income tax being paid.

With the level of income mentioned above, half of the rent is being taxed at 40% with half at 20%. The total income tax each year would be £30,000, of the remaining life of the lease that is £750,000 of income tax.

In any decision to sell land, you would have to remember that you would no longer own the underlying land, however, the upfront cash now and the potential for the overall tax to be lower could be a real incentive to sell the solar park.

Further, HMRC has been under pressure to reform CGT and the rates of tax to bring the rates in line with that of income tax. If this were to happen, then the CGT on the sale would increase from £475,000 to over £1million, depending on your other income.

While there could be a possibility to sell a solar park with no tax payable, this would require certain circumstances to be applicable where the rent is received in a trading business, which is then incorporated. If the funds are then needed personally instead of for the business, this option would not work and lead to higher tax liability.

If you have been contacted about the sale of your solar park and want some advice regarding the CGT liabilities, please do get in touch.

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