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QUESTION: “I have been approached by a solar development company looking to put a solar farm on part of my farm. They want me to grant an option over part of the farm until they know whether they will get planning etc. I am worried about the tax implications and ability to claim entitlements when it comes to transferring the farm to the next generation. Have you any advice?”
AISLING ANSWERS: As mentioned last week, from a landowner’s point of view, the development of a solar farm on part of the farm can be a highly profitable use of land.
However, landowners are often unaware of the obligations imposed on them, and the implications that may arise. In this two part series, last week’s article covered potential legal issues, while this week’s article will cover tax and subsidy issues with solar farms
Capital Gains Tax (CGT) Retirement Relief
The landowner (parent) can normally avail of Retirement Relief to avoid having to pay CGT on a transfer of the farm to the next generation. To qualify for the relief, the owner has to be 55 years of age or over and have owned and farmed the land for 10 years prior to the transfer.
The entitlement to Retirement Relief will not be affected by the fact that solar panels are installed on land which is suitable for farming, provided the area on which the solar panels are installed does not exceed half the total area of the land concerned. If it does exceed half of the area, the amount of land being transferred may have to be assessed to ensure that Retirement Relief does apply. Alternatively, the land could be left under a will. Generally no CGT arises in circumstances where land is inherited under a will.
Capital Acquisitions Tax Agricultural Relief
Land on which solar panels are installed is regarded as agricultural land for the purposes of the definition of agricultural property, provided the area of land occupied by the solar panels and ancillary equipment does not exceed half of the land comprised in the gift or the inheritance.
Thus, again it could affect how the land is to be transferred so it’s important to ensure that over half of it is not covered by solar panels.
Active Farmer Test
For gifts or inheritances taken on or after 1 January 2015, the beneficiary must also pass the Active Farmer Test, i.e. farm the land themselves for six years from the date of the gift/inheritance or lease to a ‘farmer’.
The active farmer requirement will be met where a beneficiary leases land for the installation of solar panels provided that:
- not more than half of the land comprised in the gift or the inheritance is occupied by the solar panels and ancillary equipment, and
- the beneficiary actively farms the land not occupied by solar panels or leases it to a lessee who will meet the active farmer requirements.
Where a beneficiary has leased land for the installation of solar panels and both of these conditions are met, the beneficiary will be treated as having leased the ‘whole or substantially the whole’ of the agricultural land even though a lesser amount has actually been leased. Then the the lessee will be regarded as having met the active farmer requirements in respect of the land occupied by the solar panels.
Income Tax Relief for Long Term Leasing
This relieves the amount of income tax a landowner will have to pay depending on how long they lease the land. For example, a lease of land for five years will exempt up to €18,000 in rent and BISS entitlements per annum. The longer you lease it, the more relief that applies.
To qualify for the relief, the person leasing the land (lessee) is required to use the farm land “for the purpose of a trade of farming”. A trade of farming means that the lessee is required to farm the land on a commercial basis and with a view to the realisation of profits.
Therefore, unless the solar energy company can demonstrate that they are carrying on two distinct commercial activities i.e. the solar panel activity and a farming activity and that the farmland is wholly or mainly occupied for the purpose of husbandry, a lessor who leases out his/her land to a solar energy company would not be entitled to the income tax relief in such circumstances.
Claiming Entitlements
While cases involving solar panels will be examined on an individual basis, it is currently envisaged that the area covered by the solar panels will be deemed to be ineligible for the purposes of claiming BISS. Furthermore, in line with DAFMs current approach on land eligibility, where the area of a parcel covered by solar panels is 70% or greater of the overall parcel, that parcel will be wholly ineligible. If less than 70% is covered by solar panels and the agricultural activity is not hampered by the presence of the solar panels, the area not covered by solar panels may be eligible. With regard to entitlements, it is important to remember that a farmer must use all the entitlements every two years.
Therefore, if the land is deemed ineligible for the BISS, the farmer would lose the entitlements after two years unless he/she (a) got more land (b) leased out his/her entitlements or (c) sold the entitlements.
Conclusion
It is clear that there are many taxation and legal considerations to be aware of in negotiating a lease with the solar farm developer.
There is a standard lease used by each solar farm developer and landowners should ensure that they sign up to the lease with the most favourable terms as a whole rather than the developer paying the highest rent.
Disclaimer: The information in this article is intended as a general guide only. While every care is taken to ensure accuracy of information contained in this article, Aisling Meehan, Agricultural Solicitors does not accept responsibility for errors or omissions howsoever arising. Email aisling@agrisolicitors.ie
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