Consider tax issues when planning renewables

After deciding to secure an income through renewable energy development, for many landowners the next hurdle is whether to go it alone and install and operate the project themselves, or simply to lease the land to a developer.

The two options have very different tax consequences from a capital taxes standpoint. For most landowners, inheritance tax (IHT) will be the main consideration.

Available relief

Two main reliefs from IHT are available to landowners – agricultural property relief (APR) and business property relief (BPR) – both are available at between 50% and 100%.

APR is available for in-hand farming operations, and on some types of land let to others to farm. Some renewable energy technologies allow a certain amount of agriculture to continue on the land in question.

Wind turbines and solar panels would certainly allow for some grazing around the installations, for example. The main issue is, however, that the value in the renewable energy project is not agricultural. APR only gives relief to the agricultural value of the land and so any value accruing through the use of the land for non-agricultural purposes will not qualify for relief.

APR therefore has limited effect in relieving the value of a renewable energy project. The next step is to consider whether business property relief is available. This is where the distinction between letting the land to a developer or running the project in hand is most marked.

Essentially an in-hand project is likely to be considered a trade for BPR purposes and, as such, relief may well be available once it has been in operation for the minimum required period of two years.

Let land, on the other hand, would be considered an investment activity and as such would not automatically qualify for BPR.

Project lifecycle

The first question to address in looking at the IHT exposure on a renewable project is its length. Many projects have a limited lifespan – 25 years would be typical. During the operational period of the project there could be significant value due to the level of income that it might generate, but if this is likely to dry up at the end of the Feed-in Tariffs (FiTs) regime the value will start reducing.

If, once the project has come to a natural end, the land reverts to agricultural use, relief will again be available. IHT may therefore not be of concern if the landowner is likely to see out the length of the project.

At this stage we do not know what, if anything, will replace the current FiTs regime, but in certain circumstances IHT may not be a major concern.

For certain technologies, however – most notably hydro or larger anaerobic digestion (AD) projects – the scheme lifespan is likely to continue for at least one generation and so IHT planning becomes more important.

Lifetime gifts

The first decision that needs to be made once a project is being considered is who is best placed to own the land on which the project will be run, or indeed be involved in running the business. The key point here is that it is relatively cheap in terms of tax to transfer bare agricultural land to the next generation, for instance, but as soon as there is planning for a renewable project the value will push up quickly, making any transfer of ownership more costly and possibly raising capital gains tax (CGT) issues.

Once the ownership of the project has been decided, the next question is whether the project will be run in-hand or whether the land is simply leased to the developer. As mentioned above, running the project in-hand will give access to BPR and so the value will be protected from IHT.

In many cases, however, the risk and capital expenditure required to run the project may not be attractive to the landowner and they may simply prefer to take a rent from a developer. In such circumstances it is important to consider how to structure the project to ensure the best chances of relief from IHT.

Diverse businesses

Taking a rent from a developer may not totally preclude the opportunity to claim BPR if the land in question forms part of a larger trading enterprise.

This is because BPR allows full relief if the business is wholly or mainly trading. The legislation recognises that it is possible for a business to have different aspects to it, some of which are trading and some of which are non-trading, but as long as the predominant activity is trading, relief will be available on the whole.

So, a measure must be made of how much of the business is trading. The courts have applied tests for the turnover, profit, activity levels (effectively man hours) capital values and land areas involved. If more than 50% of each of these tests lie on the trading side of the equation the tests are met and BPR will be available.

Once these empirical tests have been applied you then have to step back and consider the business in the round. If it looks like a mainly trading business with some investment activity, chances are that relief will be available on the total value of the business, including the value attached to the land let to the renewable energy project.

This is a very useful relief to have access to, but it is worth pointing out that if the investment activity outweighs the trading activity, relief will be lost on assets that might otherwise have qualified.

The capital value test can be demonstrated with the example of a farmer who owns 100ha of farmland and four let cottages. The cottages are let on short assured tenancies and the farm operations are carried out in hand. The capital values of the assets are shown in Table 1.

Based on the capital values tests, the trading assets of the business in Table 1 are worth more than 50% of the total business value and so relief would be available on the whole of the business, including the let cottages.

If the same farmer lets 40ha to a developer for a wind turbine project, the capital value of the business when the lease is entered into changes to that shown in Table 2.

Even on bare land values, taking the land for the project out of the trading operation, the trading side of the business now represents only 33% of the total value, so BPR will be lost on the total business.

This example shows that the downside to the landowner in granting a lease to a developer needs to be carefully considered from an IHT perspective. If, however, the renewable project does not tip the business away from trading, the total value of the project could qualify for relief. In situations where relief is likely to be in jeopardy, restructuring the business operation as a whole to ring-fence the trading operations in a separate entity may be considered to protect relief on the trading assets.

Alex Simmons is based at the Bournemouth office of Saffery Champness and specialises in capital tax planning for landowners, estates and other businesses

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