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Inheritance tax and solar development

27 April 2015

Where land is leased to a solar power operator, it no longer qualifies for agricultural property relief so could be subject to inheritance tax of up to 40%.

With farm incomes under such pressure, attractive deals are available for solar developments, so it is not surprising that some farmers would prefer to lease the land and accept a regular rent, but they must be aware of the fiscal implications of doing so.

Typical rents for solar panels are about £1,000 per acre index linked for 20 years. As a rental activity rather than a trade, farmers are obliged to treat this income separately. Although a lease rent of £1,000 per acre may be attractive, farmers must take account of the full picture. The potential inheritance tax levy could be as much as 40% on the value of the land rented out, so farmers should ask themselves if the potential IHT exposure is worth the rental income.

Some farmers believe that by grazing sheep under the solar panels they can retain the agricultural property relief. However, this simply isn’t the case. You have to remember that the occupant of the land under a long lease will be the tenant, ie the solar company, not the farmer; therefore the primary use of the land is not farming.

Although the Balfour Court case may help to preserve IHT relief, farmers should not rely on it. Balfour does not provide a general relief for all farming businesses that incorporate non-trading income as part of their business return and is certainly not robust enough to guarantee IHT relief on solar assets.

Even were Balfour to apply, BPR may only be available at a rate of 50% of the value of the asset rather than the full 100%. This is particularly the case where the land is owned by an individual but leased to a farming partnership or limited company.

To mitigate the risk, farmers could consider taking out a life insurance policy to cover any potential IHT liability for the duration of the lease.

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Disclaimer: All legal information is correct at the time of publication but please be aware that laws may change over time. This article contains general legal information but should not be relied upon as legal advice. Please seek professional legal advice about your specific situation - contact us; we’d be delighted to help.
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Adam Hale BA (Hons), TEP, FALA
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