Renewables – an Inheritance Tax trap or opportunity?

Generous government incentives have made more and more landowners consider renewable energy as a way of spreading their risk, maximising returns and diversifying their activities.  Landowners cannot be blamed for considering renewable projects with potential returns on investment within six years or returns of up to £1,000 per acre but for those looking at leasing arrangements consideration must be given to their inheritance tax position.

Farmland is generally exempted from inheritance tax by one of the two main exemptions, Agricultural Property Relief (APR) or Business Property Relief (BPR).  Once a wind or solar farm is placed on the land then APR is lost in most cases and BPR needs planning for.

Self-financing and development of renewables

For those choosing to carry out the project themselves, taking on the costs of planning, connecting to the grid and financing the build, there can be little argument that you are running a business. The farmer is carrying on the trade of generating and selling electricity. In these circumstances BPR should be available on the full value, including any development value, of the assets used in their business, this would include the land on which the business is situated.

Although depending on the size of the renewables project there may be a potential loss of APR on the farmhouse as a result of less land being occupied for agricultural purposes.

Passive Letting

Many landowners and farmers cannot afford the investment required for a renewables project and instead turn to a renewables developer to lease the land for an index-linked rent.  A 100 acre solar farm may generate say £75,000 of rental income a year, which will be subject to income tax.   However the land is unlikely to qualify as farmland for APR purposes as it is being occupied by someone other than the farmer under the lease. The developer is not occupying the land for any business you, as a landowner, are connected with so you may not be able to claim either APR or BPR.

HM Revenue & Customs will not accept a claim for BPR if the business in question is “wholly or mainly that of making or holding investments”.

The 100 acre let now exposes the land to Inheritance Tax with a land value of say £1.0M, possibly all chargeable at 40%. There is then the value of the lease and possibly additional exposure of the farmhouse to IHT to consider.

Tax planning Opportunities

Entering in to a joint venture or partnership arrangement with a developer may help to protect your Inheritance Tax positon. The landowner usually contributes a proportion of the capital, usually land and some working capital with the developer supplying the expertise and working capital. If the agreement is drafted appropriately with both parties seen to participate in the risk of the project then BPR should be available to protect against the Inheritance Tax position.

If the farmer wants to carry out a passive let, then there must be a full review of the business as a whole to see if the criteria established in the cases of Farmer v IRC and Balfour are applicable. In certain circumstances it may be possible to claim BPR on the letting income from renewables if they form only a small part of the overall farming and trading business. If a substantial amount of the electricity generated is used by the farm then this would further strengthen the case.

Conclusion

Renewables can provide a significant source of alternative income but careful consideration should be given to the Inheritance Tax Position of the farmer or landowner.  Each case is different and professional advice should be sought. But, with an Inheritance Tax audit of the farm and if appropriate a robust commercial agreement there are opportunities for landowners to make the most of renewable income.

If you would like more information on anything covered in this article please contact Neil Roberts on 01777 707373 – or a member of the team at your local office – we would be delighted to help you.