Rural business diversification

Are you prepared if renewable opportunities come your way?

With the Government looking to produce greener energy, there will no doubt be opportunities for farmers and landowners to diversify into renewable energy production in the future.

5th May 2021

Whether this will be small on-farm renewables to support existing businesses or large-scale sites is yet to be determined, however one area we have seen significant renewed interest is in large-scale solar (usually upwards of 40 acres).

Many of our landowning clients are being contacted by developers, who are looking to enter into an option agreement with the landowner, whereby if planning and grid connection are successful, then a 30-50 year lease is usually signed, with typical rents northwards of £850 per acre rents (usually with inflationary increases as well).

These agreements can be and are very attractive to landowners as they can provide substantial long-term returns, with very little financial risk. However, specialist advice should always be sought before signing any agreement to ensure the landowner is protected from any unscrupulous developers.

Not only should you be seeking legal advice but given the substantial level of financial return and the value of assets occupied by the lease, you should be taking specialist tax advice. Otherwise, what might have looked like the deal of a lifetime, could well turn out to be more problematic than first thought.

Take Income Tax for example. Is it going to be 20%, 40% or 45% of this revenue which you will be handing over to HMRC each year?  Do you know? Have you thought about this?

But you might be philosophical about this and even if a 40%/45% taxpayer, you might be happy with the remaining 55%/60% you get to keep after the taxman takes his cut.

Well, that’s fine, but what about the dreaded Inheritance Tax?

Not only will the value of your land subject to this lease increase in value, but chances are it will no longer qualify for Inheritance Tax reliefs.  Would you be happy for HMRC to swoop in and ask for a cheque equivalent to 40% of the land value? I suspect not.

And there’s more to consider, given the relative size of these sites, often taking up a large proportion of the original farm, not only might you have a significant Inheritance Tax liability on the leased land itself, but it could also impact the availability of tax reliefs on the rest of the farm.

One example of this, is whether you have enough of a farm (and farming activity) left, for the farmhouse to be deemed ‘Character Appropriate’ to the farm. If not, you might not be able to claim Agricultural Property Relief against the farmhouse and potentially end up paying 40% of the farmhouse value to HMRC as well.

It should be noted that I’m not trying to put people off entering into these agreements. Quite the contrary, these agreements can be a great diversification and the financial rewards can open numerous options to the farm and the family.

All I want is for you to take the necessary specialist tax advice, such that you can make an informed decision for the future. Please get in touch if you would like to discuss in more detail.