Farm Ireland

Monday 11 December 2017

5 things to consider if your thinking about a solar farm enterprise

A workman cleans panels at Landmead solar farm near Abingdon, England. The 46 megawatt capacity installation was the largest in the UK when it was completed in 2014. (Photo by Peter Macdiarmid/Getty Images)
A workman cleans panels at Landmead solar farm near Abingdon, England. The 46 megawatt capacity installation was the largest in the UK when it was completed in 2014. (Photo by Peter Macdiarmid/Getty Images)

Martin O'Sullivan

The initial flurry of activity on the part of solar power companies acquiring options on suitable lands to lease has finally died down and much of the land adjacent to ESB sub-stations has been mopped up.

However, this 'calm after the storm' period has given landowners more time to ponder the broader tax and succession implications of the deals they have entered into.

Certainly, there was no time for contemplation during that frenetic period last spring when landowners were being bombarded with tempting offers of future land leases that would leave them awash with money for the rest of their days - or so it seemed.

1. Income Tax Position

The tax relief provided by section 664 Taxes Consolidation Act 1997, which exempts income derived from certain leases of farm land, was introduced to encourage more landowners to lease out land on a long-term basis to active farmers, thereby encouraging more productive use of the land.

However, this relief does not apply where farm land is leased out to a solar energy company for the purpose of solar energy development on the land. This is because the lessee is required to use the farm land leased from the lessor on a commercial basis and with a view to the realisation of profits.

Thus, in line with the intention of the legislation to increase the access to land for active farmers who wish to enlarge their farm holdings, relief under section 664 is only intended to apply to lessors who enter into leases of farm land with genuine farmers.

Income received by a lessor from a solar energy company is not income received relating to farm land used for the purpose of a trade of farming, notwithstanding that the solar energy company may agree to occupy some of the land around the solar panels for the purposes of husbandry.

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Therefore, unless the lessee can demonstrate that they are carrying on two distinct commercial activities - ie, the solar panel activity and a farming activity - and that the farm land is wholly or mainly occupied for the purpose of husbandry (which in reality it won't be), a lessor who leases out their land to a solar energy company would not be entitled to the tax relief. The net effect of this for most lessors is that half of the rent will go to the tax man.

2. Capital Acquisition Tax issues

Where land is rented for a solar farm it is no longer an agricultural asset and becomes a commercial asset. This means that it won't qualify for Agricultural Relief -- the effect of which would be to reduce the transfer value of the asset by 90pc, subject to meeting certain conditions.

Neither will the deal qualify for Business Relief which, for qualifying recipients, also attracts the 90pc reduction. This could have a bearing for both the land owner and/or their successors. Succession planning and making a will in such instances will have an added dimension and will require expert assistance.

3. Capital Gains Tax issues

A farmer who has not owned and farmed the land for a 10-year period prior to entering into the lease or who is under 55 years of age may have a significant exposure to Capital Gains Tax if they were to transfer the wind farm site to a child.

The capital value of a site will be a multiple of the rent being generated and could amount to a substantial value as compared to the value of the land when they acquired it. Again farmers should seek specialised tax advice where they are contemplating such a move.

4. Basic Payment Considerations

The Department of Agriculture has said that cases concerning lands occupied by solar panels will be examined on an individual basis, in line with its ruling on land eligibility. This states that if 70pc or more of a parcel of land is covered by solar panels, that parcel will be wholly ineligible for tax relief. However, if less than 70pc 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.

This approach is in line with the European Commission's advice that the area covered by the solar panels will be deemed ineligible for the purposes of claiming BPS.

5. Means Test Issues for State Supports

The support that immediately springs to mind is the Nursing Home Support Scheme. Solar farm leases are typically of 25 years duration, so while you may only be in your 60s with little thought being given towards nursing home care, this lease may still be current when you are in your eighties and nursing home care becomes an issue.

The income from a lease agreement will be taken into account in determining your means, which ultimately will determine the amount of support you will receive. For example, in the case of single persons all of the rent received may go towards nursing home care in the event that the need arises.

Again, this aspect may require consideration, planning and expert guidance in terms of whose name the land should be in at commencement of the lease or whether transferring the leased land during the course of the lease is feasible.

It should be noted that as a general rule, divesting oneself of one's assets for the purpose of gaining entitlement to State supports is generally not legally acceptable, unless it occurs at least five years prior to the need for support arising.

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