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Solar farm leasing is for the long-term

While there may be a guaranteed income to be had from leasing land for a solar use, it is a long-term commitment with serious tax implications. Iain McVicar, of Albert Goodman, tells us more.

For several years the solar market was quiet, with the price of installation making the economics of field-scale solar questionable. However, this has all changed as the price of equipment has reduced. This means that field-scale solar farms are again an attractive investment proposition.

 

Recently I have been dealing with many farmers who are in the process of entering into deals. Typically the farmer provides the land and enters into a long-term lease with a developer who builds the site.

 

Of course not every farm is suitable, and you need to have an area of land, either yourself, or jointly with others, covering 25 hectares or more, and be within striking distance of a suitable electricity grid connection.

 

The most attractive ground is level or south facing, and in the mid to south of the country.

 

On a dairy farm, there are many questions that need consideration.

 

Firstly, whether this is something to be welcomed from a commercial aspect. Solar farms currently generate around £1,800/ha to £2,400/ha per year in rent. This normally increases in line with inflation and is for a period of 30 years, with an option for the developer to extend the period.

 

The first decision a dairy farmer needs to make is whether they want this on their farm. If a dairy farm is profitable and a solar site would limit production, the answer may be that it is not commercially viable.

 

For others the downside to profitability is limited, or maybe it provides an opportunity to exit dairying, so it is an attractive proposition.

 

If you are entering into a possible solar park deal, there are many other considerations other than the commercial ones. You will be entering into a 30-year deal so should start to think about this long-term.


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Paying

 

The income from solar will be liable to income tax if you own the land as an individual. For many farmers I deal with, this will push them into paying higher rates of income tax. Therefore a transfer of the land into a limited company can help. Companies pay 19% tax compared to the individuals paying 40% or more.

 

You are also changing the nature of the land for tax purposes. If you enter into a solar lease, you can no longer roll over the land sale capital gains tax free; you cannot gift the land to others easily tax free; and the land will probably be liable to inheritance tax on your death.

 

The inheritance tax point is important. A 50-year-old farmer has a life expectancy of about 30 years, so the inheritance tax point is likely to arise for many.

 

For example, your solar land may be worth £40,000/ha once it is leased out. On death a 25ha site could result in an inheritance tax bill totalling £400,000.

 

This is 12 years of after tax solar income. Do you really want to give 12 years of income to HMRC?

 

One of my favourite plans is to use a solar park as a wealth creator for the whole family. With family agreement, using a limited company to spread ownership around the family, and distribute income and capital to more than one generation can be a great answer.

 

If you are approached by a solar developer, then there are three key things you should do.

 

Firstly, think about your long-term approach from the beginning. Secondly, build flexibility into the contracts you are signing, to allow you to change land ownership if needed. You may need to change ownership between planning permission being granted and entering into a lease, so time can be short.

 

Lastly enjoy the ride, as many farming families have seen their finances transformed by solar leases.

Expert Opinion:

The inheritance tax point is important. A 50-year-old farmer has a life expectancy of about 30 years, so the inheritance tax point is likely to arise for many.

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