Rural Estates Newsletter February 2023 - Flipbook - Page 12
4 – Solar farms and Inheritance Tax
Isabel Paintin
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Solar farms have become a particularly attractive option in recent
years as rural estates look to diversify and increase income streams
(see Patrick Hammond’s article here). However, turning large parts
of an estate over to solar can have significant Inheritance Tax (IHT)
consequences which must be considered at the earliest stages of
the project. Sensible tax planning upfront can dictate major structural
changes to the overall project and ensure that opportunities to
minimise a later IHT liability are not lost. Leaving this until the solar farm
is operational is likely to be too late...
The key issue
The main problem from an IHT perspective is that a solar farm will usually take land
out of agricultural use (on which Agricultural Property Relief (APR) would likely have
been available) and also out of the farming trading business (which may otherwise have
qualified for Business Property Relief (BPR)) and instead turns it into an investment asset.
While BPR may still be available on the basis of a Balfour analysis of the whole estate,
this will not always be the case, especially given the high income streams arising from
the solar farm lease compared to the farming income from the rest of the estate (which
may well be making a loss overall). We have seen examples where the net income of the
estate is attributable in full to the solar enterprise, thus bringing into question any Balfour
analysis. The value of the land subject to the solar farm will also increase, probably as
soon as planning permission is granted if not before. This article examines possible
solutions to mitigate or eliminate the detrimental effect of solar farms for IHT.
Retaining agricultural use
It is not uncommon for solar farms to permit some continued agricultural use of the
land, most obviously by allowing sheep to graze under the solar panels, although other
agricultural uses have been reported (for example, bee keeping). This agricultural use
may allow the landowner to obtain APR for the land, but this is by no means guaranteed.
APR could still be denied where it cannot be said that the primary use of the land
is agricultural.
Even if APR is available, it will only cover the agricultural value of the land (likely to be less
than the open market value given the solar farm) thus leaving a difference which, absent
other reliefs, will be taxable. As such, continued agricultural use of the land does not
provide a complete solution.
Next generation planning
While much will depend on the individual circumstances of the landowner, there may be
a tax planning opportunity to transfer the land over which the solar option will be granted
to the next generation before the value of the land increases, thereby banking the IHT
reliefs that are available at that stage. This needs to be done early and before the option
agreement is signed. Although any increase in value is unlikely to occur before the option
is exercised, it is sensible to avoid having to novate the agreement later on should the
landowner change (which might require the developer’s consent). The transfer could be
effected either outright or by a structure such as a trust or partnership.
12
Rural Estates Newsletter
February 2023