11th March 2022
In this article, Nicola Parkinson and Kathryn Brook, specialist lawyers from Walker Morris’ Tax and Infrastructure & Energy teams respectively, highlight potential tax issues associated with solar farm developments. This note is intended as a guide to facilitate initial negotiations between developers and landowners at the outset of a development, and to prompt and inform discussions between landowners and their advisors.
This article is predicated on the typical solar farm legal structure whereby the developer will be the initial lessee of the site. It assumes that the solar farm site will be leased to the developer or an investor, and the developer will fund the application for planning permission and construction of the solar farm. The landowner will be entitled to rental income from the project which is likely to be linked to revenue from the site. The lease term is likely to be around 25 to 40 years. The article focuses, in particular, on the tax issues relevant to farmers or land/estate owners who currently use the land for the purpose of an agricultural trade – a particularly common scenario.
It is worth noting, however, that the landowner tax issues are substantially the same where the developer constructs the project for an investor lessee.
Farmers and other agricultural users can carry on their activities through a variety of structures and the impact of tax issues will depend very much on the particular structure, the size of the project relative to the farming activities and whether the landowner has already undertaken business and estate tax planning.
The following general summary of issues is particularly relevant to agricultural landowners who own the land individually, rather than through a company or trust.
Farmers carry on a trade in relation to their agricultural activities. A site which becomes a solar farm ceases to be used for the purposes of that trade and this has potential tax implications.
Farmers may want to continue with grazing the site if that is possible but, even if grazing continues, the site will only be partly used for the farming trade and therefore the tax issues cannot be entirely avoided.
Farming and landowning businesses have a significant part of their value in the land they own. Such businesses will often be carried on by family members and the farm assets at some stage will be passed between family members. A significant tax issue for farmers is therefore how tax liabilities can be managed on transfers of land relating to family business or wealth restructuring, and the potential impact of tax on the death of a landowner.
Land used for a farming trade benefits from important tax reliefs:
These exemptions and reliefs will generally cease to apply to the land used for a solar farm, as the land will no longer be used for the farming trade.
If grazing is allowed, IHT APR relief may be available but will be limited to the agricultural value (that is, excluding the additional value created by the project or any associated planning permission).
BPR may also be available if solar farm rental income forms only a small part of the income of the farm trade, but this depends on the specific facts and is only likely to be relevant on very small projects.
The loss of these IHT and CGT reliefs will increase tax costs on future gifts of the land as part of family business or succession planning, and will increase the IHT liability on death of the landowner.
To mitigate the potential tax cost of the loss of reliefs, landowners may be well-advised to take some of the following steps before entering into a solar farm project:
Walker Morris’ Infrastructure & Energy team can support both landowners and developers with solar projects, in particular with the negotiation and documentation of land and commercial arrangements. Whilst Walker Morris’ lawyers cannot provide inheritance tax advice, for example in relation to landowners’ succession or estate planning, we are happy to make introductions to appropriately experienced advisors/accountants.
*That is, any trade which can include farming trade