J ames Tucker, Business Advisory Partner explains why it’s so important for landowners to understand the tax implications of entering into renewable energy schemes and why careful consideration needs to be given to structuring the transaction. Historically, some farmers have been reluctant to explore options which take good quality arable land out of production. However, with the phasing out of the Basic Payment Scheme over the next few years, renewable energy schemes are now being seen as lucrative diversification opportunities for landowners – providing them with profitable alternative income streams. Often, the significant sums involved can make a real difference to the long-term sustainability of the farm and financial security of the younger generations. Below is an example of a recent case with clients looking to explore using some of their land as a solar farm. Post-Budget we’ve been able to implement a structure which not only minimised the tax payable on their rental income, but that also optimised the family’s inheritance tax (IHT) position, enabled the younger generation to meet their income needs and incorporated a Trust to pay the grandchildren’s school fees! Solar or battery storage schemes can create a substantial rental income stream over a long period (often more than 40 years) which makes land incredibly valuable. Landowners have the option to either sell the land for this purpose (permanently reducing the size of the farm available to pass down to future generations – not usually a popular choice) or to use the income stream to re-invest in the farm (and other assets).
Income then generated from solar farms and battery storage is generally taxed in the same way as rental income. Where this is subject to income tax – and given the typical amounts involved - this will likely mean that tax is payable at the top rate of 45%. So, with these clients we started by looking to transfer the land to a limited company meaning the rental income would fall to be taxed at 25% instead. Now, this strategy is particularly effective where the base cost of the land is high (i.e. where the land has been purchased or inherited recently) and can therefore be sold to the company for that same amount. Although the land will now have a much higher value due to the solar/battery option agreement (with the value continuing to increase over time as they get closer to spades in the ground), any capital gain can be held over, meaning that there is no upfront Capital Gains Tax (CGT) cost. The company now has a valuable asset which it bought for the original cost of the land. But of course, the recently formed company did not have any money to pay for the land so it actually owes that amount to the client – providing a useful pot of money which can be drawn down (tax free) to supplement the client’s pensions and investment income during their retirement. In forming the company, we also looked carefully at the needs and wishes of the wider family to structure the shareholding in the most efficient way. Children and grandchildren were given certain shares in the company so that they could benefit from dividend income, capital receipts or both. Some of the shares were also transferred to a discretionary Trust, with dividends payable on those shares earmarked to pay school fees. One of the problems which has taken up numerous column inches since October though is the thorny issue of the ‘gift with reservation of benefit’ rules (GWROB), which basically say that you can’t give something away and then continue to earn an income from it if you want that asset to be excluded from your estate for inheritance tax purposes.
The structure we implemented for this client meant that we avoided this problem and instead enabled wealth to be transferred to the younger generations via their shares. All whilst still making sure the client had the ability to draw funds from the company in the form of loan repayments. There are of course no guarantees with these types of schemes that they will come to fruition. No matter what the prospects of the deal are at the early stages, there are numerous planning, regulatory and commercial hurdles to overcome before the money becomes real. The problem is, especially with the recent changes to the inheritance tax regime, the planning really needs to be put in place now. To benefit from some of the opportunities brought about by the drive to net zero, relies to some extent on a family farm being in the right place at the right time (ideally close to a National Grid substation!). But it also illustrates that there are real advantages to be gained from thinking laterally about the issues that so many farms are now facing following the recent Budget. In this case, our clients now have a structure that achieves all of their objectives and ensures the future security of the farm for future generations of the family… subject to planning permission of course! If you’re considering renewable energy income streams for your farm or keen to know more, give James or one of the team a call on 0330 058 6559 or email us hello@scruttonbland.co.uk
AGRICULTURE AND FARMING | SCRUTTON BLAND | 1 5
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