Advice on legal and tax angles for renewables projects

Solar developers continue to look for sites and interested landowners can do much to put themselves in the best position to proceed.

Interest in potential wind turbine sites is also growing, but slowly.

Farmers Weekly looks at the processes and considerations of venturing into agreements.

See also: Solar lease opportunities: What to consider

Land rights

Clarity on who owns the land is the starting point, say advisers, so that the process does not go so far only to discover that the person proposing to sign documents doesn’t have the right to do so.

Paul Sams, managing partner at law firm Dutton Gregory, says: “Clear ownership is essential – generational land ownership often has complicated title issues, incomplete probate or informal agreements.

“It’s also not uncommon to see charges remaining on titles after the land has passed to a new owner.”

Once title is established, other related rights need to be checked – for example shooting rights, mineral rights and any right to occupy the land.

See also: [Please use link to AD story in renewables special, due to go online Sat 11 Oct, WP ID 1825499] 

If a third party has any rights then money may have to change hands to release those rights, says Naomi Stewart, head of tax at accountant Martin and Company part of the Shaw Gibbs group.

There’s no obvious type of professional advice with which to begin but it’s important that legal, tax and land agent advice is sought, she says.

“Something that might work well from a legal angle may not be so good from a tax perspective so it’s good to get all advisers together.”

Common mistake

Taking action without advice tends to be one of the most common causes of problems with projects, in terms of whether the right structure has been chosen, where the income is going and whether the plan meets the family’s aspirations, says Naomi.

There have been instances of land being allocated to a solar project without considering the knock-on effect in terms of servicing existing borrowings and the impact on overheads in the farming business, she says.

Tax aspects

The key tax advice for a renewables project is to think about the structure, says Naomi. 

“Ninety-nine times out of a hundred, if you’re thinking of restructuring the land holding, it’s best to do that before planning permission is achieved and it goes up in value.

“The basic point is that someone will get an income stream and that income will be subject to direct tax whether income tax for an individual or trust, or partnership corporation tax in a company.

“These are long-term projects covering decades, so you also have to think about how things might develop over time.

“It’s possibly better to keep it out of the business and transfer the land, to keep that income outside someone’s estate before the value goes up.”

IHT relief risk

Much as the loss of 100% inheritance tax (IHT) relief is a massive blow to the agricultural sector, 50% relief is still worth a lot, so it’s important to guard against losing that, says Naomi.

“The risk with converting land which perhaps just had an agricultural purpose into a renewables purpose can jeopardise the relief not just on the land in question but on wider assets as well.”

This is because leasing out the land is regarded as investment activity rather than trading.

Too high a proportion of investment income will jeopardise the availability of business property relief (BPR) from IHT.

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“If you tip the balance from trading to investment then you’re risking all of the potential relief.”

HMRC uses an assessment known as the Balfour test, looking at the proportion of each type of activity in four areas:

• Income – is it farming income, or leasing (investment) income?
• Profit – what is the source of profit?
•  Land value – taking land from agricultural trading value to a considerably higher investment value “unbalances” the balance sheet in terms of trading assets versus investment assets
• Time spent by individuals on different parts of the business – this is likely to be less of an issue than the first three factors

“If you take land that was agricultural trading and put into a leasing business in a partnership for example, you’re at risk of putting the balance of activity in that partnership into investment and then you’re not going to get BPR on any of the partnership assets.”

Cashflow and tax planning also need to take account of projects often taking several years to get under way.

To keep the trading and investment sides separate, whether a renewables project is leased or owned, the general advice is to keep it outside the main farming business, says Naomi.

“It does depend on what else is going on in terms of the dynamics of that farming business – if there is very little investment activity it may be best to keep the new venture in the original business, but very often there are already other investment income streams such as commercial units, workshops or business units and adding another investment enterprise could tip it over from a tax perspective.”

Strategic collaboration

Often a solar development involves several landowners – early collaboration between them can pay off in terms of fairly, equitably and tax efficiently sharing the income from the project.