14 Jul 2016

ransforming an underused piece of land into a profitable renewables project is a prospect that few landowners would willingly pass up.

Transforming an underused piece of land into a profitable renewables project is a prospect that few landowners would willingly pass up. Indeed, in recent years, more and more farmers have turned their attention to solar panels and wind turbines as a way to diversify their income by generating and selling electricity. However, while expanding into the renewables market might seem like easy money, farmers should first consider the potential Inheritance Tax (IHT) consequences.

Developing a renewables project

Farmers typically turn to developers to help them get their renewables projects off the ground, as few possess the requisite experience – or capital – to do so themselves. This kind of arrangement usually results in a scenario in which the landowner leases the land to the developer in exchange for a rental income based on a set value per acre.

Less commonly, some farmers choose to pursue matters without the aid of a developer. The process of generating and then selling electricity is clearly a business activity, so will be treated accordingly for tax purposes.

What about Agricultural Property Relief (APR) and Business Property Relief (BPR)?

APR has long been a means of helping farming families avoid the costly consequences of IHT. However, certain activities can render land ineligible for APR – including letting land to energy companies. This is because the primary use of the land is no longer agricultural. Even if the farmer uses the land around the wind turbines or solar panels for grazing, the land would still not qualify for APR.

Alternatively, landowners risk losing out on BPR. This tax relief is not available in circumstances where a farmer is deemed to be wholly or mainly making or holding investments. In other words, if a farmer’s main business is not principally a farming business because, for example, they are letting land to energy companies, they will not be entitled to BPR. However, the availability of this relief can only be determined after evaluating the size and output of the development within the context of the business as a whole.

Financial considerations

In light of the exposure to IHT, farmers should evaluate the financial risks associated with renewable energy projects. However, there are suitable measures landowners can put in place to minimise the risks. Certain life assurance policies, carefully drafted agreements and / or the use of special-purpose vehicles can all offer protection from IHT liabilities, so should be considered before any development gets under way.

For more information contact Andrew Williamson on 01223 225144 or andrew.williamson@taylorvinters.com