Alternative land uses: Leasing land for solar – key points

Leasing farmland for solar can remove some of the risks associated with traditional agriculture by generating an annual index-linked income for 40 years, typically at £1,000/acre. 

As extreme weather and volatile input prices challenge profitability on UK farms, the guarantee of a fixed annual income from land makes renewable energy an attractive option for some landowners.

If a farm can meet the principal critical test of being located less than 10 miles from an electricity substation, it has potential as a solar farm, advises George Hall, of Conrad Energy.

At a recent Farmers Weekly event at the company’s flagship solar project, Larport Solar Farm in Herefordshire, George said renewable energy gave farmers a certainty of income.

“The one certainty in farming is that we don’t know what is coming tomorrow but leasing land for a project like solar gives that certainty,” he said.

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When solar farms were first rolled out, the lease periods were 25 years but they are now more commonly 40 and some 50 years.

Base rents depend on where the land is but, George suggested: “If you said £1,000 an acre you are not going to be a million miles off.”

At 125 acres, for a site at the scale of Larport, the maths is quite easy, he added.

“That is then linked to inflation so for the length of the lease you will see that steady income coming in continuously.”

Most deals will offer the alternative option of a percentage of the site revenue, typically 5%.

“If you were to take energy prices where they are at the moment, at a site like this at 5% of revenue you are looking at £1,400 – £1,500 an acre,” Mr Hall calculated.

Solar doesn’t represent a land use change from a planning perspective because the land must revert to its original state at the end of the project’s lifespan, but planning consent is required as it is a semi-permanent structure.

There are key considerations for establishing a solar farm.

Grid connectivity

Proximity to a sub-station is the most important factor determining a site’s eligibility for development.

“If we have got grid we have got a project,” said George.

The maximum distance developers will consider hinges on the size of the project.

“Economies of scale need to be considered but some will run cables eight to 10 miles,” he said.

For a smaller site, there is also an option to connect into overhead power lines.

Planning

The planning process can be tricky and will take around a year, said George.

Getting the community on-side at the outset, during the consultation process, is key, he added.

Timelines vary, but from the point of considering a site for development to it going live is mostly five to six years.

“There is a lot of work involved in pulling together a site like this and the planning fees are horrendous,” he said.

“At Larport we started in 2019, got planning permission in 2021, started work on site in June 2023 and are live now.”

Rent payments to the landlord commence when construction work starts.

Victoria Fielding-Kirby, of communications and marketing consultant Energy Creative, worked with Conrad Energy and advised “communication, communication, communication” throughout the planning process.

“Your plans may take shape, they may change as there might be something really important to the local community that you need to work around, so making sure you adapt and reflect on those considerations in the community engagement is really important.

“If you can bring people along with you early and you are open, transparent and honest then generally your project will have a much higher rate of success.”

Tax

There are major tax implications for landowners to consider before entering into solar farm lease agreements as in the worst case scenario income could be taxed at 63%.

Income follows land ownership therefore a project generating an annual rental income per owner of £12,570 – £50,000, would incur income tax and National Insurance at 26%, while earnings between £50,000 and £100,000 would be taxed at 42%.

But at £100,000 the effective tax rate is 63%, warned Iain McVicar of accountant Albert Goodman.

At £125,000 the tax rate falls to 47%.

“You need to decide when you are looking at solar development what you want to do regarding that income as tax rates on income are pretty chunky, and to think long term too as these deals are for long periods of time,” Iain advised.

If the income is received through a limited company structure, the tax rate is 19% up to £250,000, and 25% above that.

There is therefore a big variation on tax paid on personal income and payments received by a limited company.

“If somebody is already earning £30,000 of income and then gets £80,000 a year of solar income, over a 30-year period that is £2.4m of extra income and £900,000 of extra tax, but if they receive it as income while in a limited company the tax is £500,000,” said Iain.

Inheritance tax (IHT) is another very important consideration.

While solar land may be classed as agricultural from a planning perspective, for tax purposes it ceases to be so the moment the lease is signed. 

At that point it not only becomes an investment property but its value will be higher than its status as agricultural land – perhaps £25,000/acre compared with a farmland value of £10,000/acre.

No IHT is payable on farmland used in the farm business but that relief is not available once a lease is signed.

“If I am receiving £1,000/acre plus a bit of an uplift from 125 acres of solar, if I died owning it, it would take 14 years of the solar income at £1,200/year to pay that IHT bill,” Iain pointed out.

“That’s quite a sobering thought that if you enter into a 30-year deal nearly half of it goes to pay the IHT bill.”

When farmland is gifted down the generations, no IHT is payable if the donor survives by seven years but the rules are different when handing over solar land.

“On the day that you lease the land out you don’t have the same reliefs so when you want to gift land, for example giving a child an acre of solar land, capital gains tax (CGT) is worked out on that land,” said Iain.

“If the land is valued at £25,000 an acre there is CGT payable at £5,000, and there are no reliefs.”

There are ways of gifting land once it has been leased out but the tax-free element of this is limited to £325,000 in value per person giving it, every seven years, he added.

“We can do it but it is slightly more difficult and you have got to plan decades in advance to be able to do that.”

He advised starting early with tax planning.

“Making sure you do things before you sign the lease is critical,” he said.

Putting a clause into the option agreement that gives time for ownership of the land to be moved before the lease is signed is sensible.

The option agreement will quite often state that the moment planning permission is granted the landowner must sign that lease.

“I like to build in a bit of a time gap, maybe even only 21 days between planning permission being granted and the ability of the energy company to be able to enter into the lease, as that gives 21 days to get documents signed,” said Iain.

“These documents will need to already be in place and that allows farmers time to get the land assigned to the right place.”

He believed this allowed “the best of both worlds”.

“As accountants we don’t want to interrupt the commerciality of what are great deals but we want to make sure that they are fit for purpose for the families involved.”