Business Clinic: How would solar lease affect IHT reliefs?

Can grazing sheep under solar panels protect entitlement to inheritance tax reliefs?

Clare Hulme of accountant Duncan & Toplis outlines what must be considered in such circumstances.

Q. We have been invited to consider leasing some land for a solar farm.  The block of land is about 30 acres (about half of our farm) and is poor-quality, steep and permanent grass.

My wife and I are in our seventies and our son will inherit, so we are interested in whether a 25-year lease will affect liability to inheritance tax.

The solar panels will enable sheep to graze underneath.

A. In your situation several issues need to be taken into account. These include the tax implications, but any decision should not be led by the tax implications alone.

You and your wife are in your seventies and your son will inherit your farm. Is your son involved in farming currently and does he wish to continue to actively work the farm once he inherits it? What are his thoughts about the potential solar farm? These are all questions that should be considered.

If you move forward with the solar farm you will be committing the land to this venture for a minimum of 25 years, which will most likely see a change in ownership during the lease period. 

See also: Business Clinic – advice on capital and inheritance taxes when diversifying

Therefore a discussion with your son about his future plans and thoughts would be beneficial. When it comes to succession planning, open communication between family members is key to ensuring everyone involved is happy with what is planned and will happen.

Once planning for solar panels has been granted, the value of the land will increase considerably, and should the agricultural use be considered to have ceased, inheritance tax (IHT) and capital gains tax (CGT) reliefs may be lost.

As you state, it may be possible to retain the right to graze sheep around the solar panels and to claim direct payments (and possibly whatever replaces it in terms of support), but this may result in a lower rent being offered by the solar farm. The acreage will become less productive for grazing.

While you are actively farming all of your land (about 60 acres), the following IHT reliefs would be available to you:

• Agricultural property relief (APR) – 100% relief on the agricultural value of the land
• Business property relief (BPR) – 100% relief on the value of the land

If the land subject to the lease is no longer farmed and is let with exclusive access to a solar farm, then APR will be lost. If you maintain the right to graze sheep, APR may be available on some of the land at its agricultural value.

When considering whether BPR would be available, you would have to look at the business as a whole. BPR could be available on the full value of all the land if it is run as part of a larger trading business, and the rental income formed a small part of the total income. 

Looking at your scenario, I would be worried that BPR would not be available as you are changing the use of half of your land from agriculture to solar, and I would expect that the rental (non-trading) income from the solar farm would be the greater element of your total income.

Even if this were not the case, there is a risk that APR could be lost on the farmhouse, depending on its size in relation to the continuing agricultural operation

If yourself and your wife are in good health, and do not need the rental income, it may be worth considering gifting the land to your son, before planning for solar is obtained (before any uplift in value) as a Potentially Exempt Transfer (PET). This would take the land out of your estate for IHT purposes, should you survive for seven years following the gift. 

By gifting the land at this point it will usually qualify for holdover relief from CGT, and can be transferred to the next generation without crystallising a CGT charge.

If you gift the land once it is being used as a solar farm, it will not qualify for holdover relief and will create a CGT charge, which would be based on a higher market value, now that it has planning for solar.

Two valuable CGT reliefs – entrepreneurs relief (ER) and rollover relief – are likely to be lost due to the rental income being predominant.

In summary, if you do move forward with a lease for a solar farm and do not make any changes to the ownership, the IHT liability on yours and your wife’s estate will increase because valuable reliefs may be lost.

This will  also add complexity to the administration of your estate.  I would strongly recommend speaking to a specialist agricultural tax adviser before proceeding, so that they can quantify the position for you.