Solar farms: Tax considerations for landownersPrint publication
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.
Solar project legal structure
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.
Landowner tax issues
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:
- Inheritance tax (IHT): IHT potentially applies to the value of land owned at death of the owner and to lifetime gifts of land where the land is transferred less than 7 years before the death of the owner. Land used for the purposes of farming or other agricultural trade benefits from Agricultural Property Relief (APR) which exempts the agricultural value of such land from IHT. Farming land is also likely to benefit from Business Property Relief (BPR) which provides a similar exemption from IHT for land and other assets used for the purposes of a trade*. In contrast to APR, BPR is not limited to the agricultural value of the land.
- Capital gains tax (CGT): CGT applies to capital gains made on gifts or sales of land. Gifts of land between family members will usually be treated as made at market value. Land used for farming benefits from CGT holdover relief. This relief applies to gifts of assets used in a trade* and allows the gain on a gift to be transferred to the recipient and effectively deferred until the recipient disposes of the asset. Holdover relief is particularly important on gifts of farmland as it avoids a tax charge arising on a gift where there are no sale proceeds to fund the tax.
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.
What practical advice arises?
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:
- Ensure that grazing can continue on the site to retain the benefit of APR on the agricultural value of the land.
- Transfer some or all of the site to family members or to a company before planning permission for solar farm use is obtained. This has a dual purpose/benefit: (1) to allow the landowner to implement business and family succession planning in relation to the site while the IHT and CGT reliefs applying to agricultural land apply; and (2) in relation to CGT holdover relief, to ensure held-over gain is based on the lower site value before planning permission for the site is obtained.
- Seek tax advice early! We recommend that landowners should identify their individual tax requirements at an early stage, not least because issues arising at a later stage can delay or even stop a project. Discussion between landowners and their tax advisers about the project and the potential tax implications at the outset can help to ensure that any potential issues are anticipated, and pre-emptive tax-planning solutions can be implemented.
How we can help
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