In 2020, there has been an increased interest in solar and windfarm companies looking to enter into option agreements to acquire land to potentially erect solar panels or wind turbines.
While this is a potential game changer for the agri-sector and its contribution to the reduction in carbon emissions, ambiguity exists regarding some of the tax treatment of the renewables systems. The typical contract that a solar or wind farm company is looking to enter into with the land owner is broken down into a number of sections and needs careful legal and tax consideration.
On examining the agreement – and before signing it – remember that you have the potential to extract funds from the renewable company for:
Professional fees contribution other than legal, such as tax consultancy.Signing-on fee.Fee when planning is granted.Commercial annual lease amount.The first part is the option agreement to lease the land. Here, the renewable company will look to enter into a binding option agreement with the land owner.
In effect, this agreement binds the landowner on the terms, as agreed, to lease the land to the solar or wind company once certain conditions have been met, such as the approval of planning permission.
Once signed, this option is treated as a separate asset and can be subject to Capital Gains Tax. The ultimate tax treatment depends on whether the option agreement commences or not.
If the option agreement commences, then it merges with the lease and can therefore be deemed to be a premium on a lease. It is then liable to a mixture of Capital Gains Tax and income tax.
If the option does not commence, this payment is still liable for Capital Gains Tax from the date the original option agreement was entered into.
If planning or other difficulties arise and there are delays, then you could be looking at a number of years where interest and penalties are accruing on the tax liability. Uncertainty on final tax can be problematic and is the first point of certainty required.
Once planning permission is granted and the lease comes into play, – ie the option agreement is exercised and the annual income stream starts to flow – this income the landowner is receiving is liable to be subject to income tax. Examine your personal situation and look at the options available to minimise the income tax.
A number of tax planning opportunities are available, which include:
Employment incentive investment scheme.Paying maximum pension against other trade incomes.Possibly incorporating your business.Possible transfer or incorporation of the land area being leased to the renewable company.3 VAT
As the renewable company will be the one doing the work, any VAT liability will remain with them.
However, even as an unregistered farmer, a potential VAT liability could arise if you transfer or sell the land within five years of development, thus requiring clear succession planning overview at the time you enter into the agreement with the renewable company. If farming could be exempted from the VAT, as most farmers are unregistered, it would remove another obstacle.
This is the area where the greatest uncertainty arises. Not withstanding that tax laws were changed to encourage solar farms, no such law change applied to wind farms.
The Finance Act 2017 extended the definition of reliefs to include “lands used for solar where not more than half the land concerned” is covered by solar panels. This is the area that needs to be clarified:
What is half the land concerned, as stock can graze in and around the panels?How will the Department of Agriculture basic payment section treat land under solar?What percentage will they deem to be farmland?The two reliefs which may be affected are retirement relief for Capital Gains Tax (CGT) and agricultural relief for Capital Acquisitions Tax (CAT).
While this problem exists for solar, land used for the development of wind turbines do not even have the benefit of this ambiguous legislation and have no tax breaks.
The issue that arises in both solar and wind is that the portion under renewables could lead to reliefs being unavailable on the other land. In considering renewables, take proper professional tax advice, in addition to sound legal advice, and consider the options that best suit you.
Renewables are a wonderful source of funds for your farm and, even with tax issues, may still be the best alternative.
In 2020, there has been an increased interest in solar and windfarm companies looking to enter into option agreements to acquire land to potentially erect solar panels or wind turbines.
While this is a potential game changer for the agri-sector and its contribution to the reduction in carbon emissions, ambiguity exists regarding some of the tax treatment of the renewables systems. The typical contract that a solar or wind farm company is looking to enter into with the land owner is broken down into a number of sections and needs careful legal and tax consideration.
On examining the agreement – and before signing it – remember that you have the potential to extract funds from the renewable company for:
Professional fees contribution other than legal, such as tax consultancy.Signing-on fee.Fee when planning is granted.Commercial annual lease amount.The first part is the option agreement to lease the land. Here, the renewable company will look to enter into a binding option agreement with the land owner.
In effect, this agreement binds the landowner on the terms, as agreed, to lease the land to the solar or wind company once certain conditions have been met, such as the approval of planning permission.
Once signed, this option is treated as a separate asset and can be subject to Capital Gains Tax. The ultimate tax treatment depends on whether the option agreement commences or not.
If the option agreement commences, then it merges with the lease and can therefore be deemed to be a premium on a lease. It is then liable to a mixture of Capital Gains Tax and income tax.
If the option does not commence, this payment is still liable for Capital Gains Tax from the date the original option agreement was entered into.
If planning or other difficulties arise and there are delays, then you could be looking at a number of years where interest and penalties are accruing on the tax liability. Uncertainty on final tax can be problematic and is the first point of certainty required.
Once planning permission is granted and the lease comes into play, – ie the option agreement is exercised and the annual income stream starts to flow – this income the landowner is receiving is liable to be subject to income tax. Examine your personal situation and look at the options available to minimise the income tax.
A number of tax planning opportunities are available, which include:
Employment incentive investment scheme.Paying maximum pension against other trade incomes.Possibly incorporating your business.Possible transfer or incorporation of the land area being leased to the renewable company.3 VAT
As the renewable company will be the one doing the work, any VAT liability will remain with them.
However, even as an unregistered farmer, a potential VAT liability could arise if you transfer or sell the land within five years of development, thus requiring clear succession planning overview at the time you enter into the agreement with the renewable company. If farming could be exempted from the VAT, as most farmers are unregistered, it would remove another obstacle.
This is the area where the greatest uncertainty arises. Not withstanding that tax laws were changed to encourage solar farms, no such law change applied to wind farms.
The Finance Act 2017 extended the definition of reliefs to include “lands used for solar where not more than half the land concerned” is covered by solar panels. This is the area that needs to be clarified:
What is half the land concerned, as stock can graze in and around the panels?How will the Department of Agriculture basic payment section treat land under solar?What percentage will they deem to be farmland?The two reliefs which may be affected are retirement relief for Capital Gains Tax (CGT) and agricultural relief for Capital Acquisitions Tax (CAT).
While this problem exists for solar, land used for the development of wind turbines do not even have the benefit of this ambiguous legislation and have no tax breaks.
The issue that arises in both solar and wind is that the portion under renewables could lead to reliefs being unavailable on the other land. In considering renewables, take proper professional tax advice, in addition to sound legal advice, and consider the options that best suit you.
Renewables are a wonderful source of funds for your farm and, even with tax issues, may still be the best alternative.
This is a subscriber-only article
SHARING OPTIONS: