Over the last year or so, several of our farming clients have received approaches from developers looking to lease land to construct large-scale solar parks. Typically, this varies from around 50 acres to 1000+ acres.
Stephen Headley, a consultant at Smailes Goldie, and his wife own their farm near Selby. Stephen and his neighbour were contacted by several developers leading to a scheme which, at the time of writing, awaits a decision from planners. As a result, Stephen has experience of advising landowners on the tax implications of such schemes as well as the landowner’s perspective. Stephen writes:
Developers will usually offer a rent many times greater than the likely income from farming, with a range around £800 – £1000+ per acre. They offer the promise of a long lease of around 30 – 40+ years, a potential share of the gross revenue from the scheme and an index linking of the revenue stream.
The schemes do not rely on any support from government and changes to the cost of solar panels together with increases in wholesale electricity prices mean that it is becoming increasingly possible to develop commercially viable schemes.
Solar parks can also generate a reasonably secure and reliable long income stream which makes them attractive to purchasers such as pension companies for onward sale. The technology is well proven, and the sun is reasonably consistent year on year.
All in all, it is not surprising that many landowners find them an attractive proposition.
For any developer, the main criterium is the ability to secure a cost-effective grid connection and, following on from this, planning permission. Prior to approaching any landowner, the developer will usually do a degree of homework to check available capacity at the local substation and the suitability of the site for a solar park. Unsurprisingly, sites adjacent to a substation with capacity are likely to receive several offers. The absolute cost of the connection is less important than the cost per unit of generation. And the greater the cost, the more acres that are required to make the scheme cost effective.
As a landowner, I felt it was vital to involve a land agent with experience in this type of project at an early stage to assist with negotiating the deal. We, and our neighbour, used Rod Cordingley at Stephensons Rural.
The developer needs the landowner to sign a letter of authority to apply for a connection which effectively locks out other developers on that site for a period. With us, when a satisfactory grid connection offer was received, the developer looked to negotiate detailed heads of terms. While non-binding, these set out the major terms to be incorporated into an option to lease the land, subject to planning and a draft lease. Rod advised us that “the heads of terms are a vital document to help iron out the key terms and any major issues including the rent, any overage based on the performance of the scheme, drainage and provision for decommissioning.” Once the heads of terms were agreed, our solicitors drafted the formal documentation.
All aspects of the planning process were taken care of by the developer including numerous surveys, reports and other evaluations. I was pleased that the developer always contacted me prior to site visits and that they were happy, within reason, to work around our various farming operations and cropping.
The planning application was submitted in August 2021, and I hope a decision will be made shortly.
Obviously, a solar development is a major change for many farming businesses. I encourage each business to consider the tax position at the earliest opportunity, particularly as the value of the land is likely to increase as the likelihood of a successful planning application increases. The period between the developer’s first approach and the exercise of the option usually offers a window to undertake a review and take any appropriate steps while the land is still being used for farming.
That said, I must emphasise that there is “no one size fits all approach” and it is important to consider the individual circumstances and objectives of those involved. I believe the two main areas to consider are the taxation of the rental income and the effect on the capital tax position.
The scheme is likely to generate a significant long term income stream for the landowner. It is often well in excess of the current profits of the business and many farmers will wish to retain as much of this income as possible, to use to finance land purchases or other projects. The post-tax income could either be accumulated for future use or used to finance a bank loan which in turn is used for capital reinvestment.
Typically, I would expect the land to be leased to the developer by a limited company, often newly established – let’s call it ‘Newco.’ With Newco to benefit from the lower rates of corporation tax (currently 19% rising to 25% in April 2023) on the rental income when compared with the higher rates of income tax of up to 45%. In other cases, the use of pension schemes may be considered which allows the income to roll up tax free.
Careful planning is required to mitigate any capital tax costs of Newco acquiring either a freehold or leasehold interest in the land. The tax reliefs to achieve this usually depend on the land been used for agriculture/trade purposes. Hence the need for early action. It is also necessary to consider any Stamp Duty Land Tax implications of the plan.
The second key area to recognise is that it’s likely that the land will no longer qualify for Agricultural Property Relief which gives 100% relief from Inheritance Tax (IHT). Although sheep may graze under the panels, the predominant use of the land is clearly as a solar park.
Depending on individual circumstances, it may be possible to claim Business Property Relief which also gives 100% relief from IHT. At present this depends on the trading part of the business (i.e. excluding the solar scheme and any other non-trade assets) forming at least 50% of the whole business. However, there are several reports suggesting this 50% test could increase to as much as 80%.
My personal view is that it may be prudent to consider passing the land for the proposed solar scheme to the next generation while it is still being used for farming, if this fits in with the overall family objectives. It should be borne in mind that the land is initially likely to attract a significant development premium which will probably reduce as the lease progresses. Again, advice from your land agent is vital.
Overall, whilst it is attractive, it’s still an area of great complexity and one I’d urge needs evaluation from multiple angles. Do please call either your usual Smailes Goldie contact or myself if we can assist in this area.
