FARMERS with solar panels on their land should consider taking out life insurance to cover the potential inheritance tax liability, a leading farm accountant has warned.
Where land is leased to a solar power operator, it no longer qualifies for agricultural property relief, so could incur inheritance tax of up to 40 per cent, says Mike Butler, senior partner at Old Mill.
“With farm incomes under such pressure, and attractive deals available for solar developments, it’s hardly surprising that some farmers would prefer to lease the land and accept a regular rent,” he says. “But anyone doing so must be aware of the fiscal implications.”
A typical rent for solar panels would be about £1,000/acre, index-linked for 20 years. As a rental activity rather than a trade, farmers should treat the income separately, as there is no requirement to account for National Insurance on it.
“However, the rental income will still accrue alongside other income, incurring Income Tax at the appropriate rate,” says Mr Butler.
Although a 20-year rent of £1,000/acre may be attractive, it is important that farmers take account of the full picture, he warns.
“Let’s assume the rent is taxed at 40 per cent – that makes the actual income £600/acre. Over 20 years that would total £12,000.
“But the potential inheritance tax levy could amount to 40 per cent – on a land value of, say £15,000 – that would equate to £6,000 in tax.
“You therefore have to ask yourself whether the potential IHT exposure is worth the rental return.”
Some farmers believe that by grazing sheep under the solar panels, they can retain the Agricultural Property Relief, says Mr Butler. “But that simply isn’t the case.
“You have to remember that the occupant of the land is the tenant, ie the solar company, therefore the primary occupation of the land is not farming.”
Although it is possible that the Balfour court case could help preserve IHT relief, farmers should not rely on this, he warns. “In reality the verdict is still out – Balfour will not provide a general ‘carte blanche’ relief for all farming businesses that incorporate non-trading income as part of their business return.
“It certainly should not be relied upon as a robust solution to maintaining IHT relief on these sorts of assets.”
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