A new kid on the block in the green energy sector has resulted in many questions that have and will challenge tax professionals. Many farmers are looking seriously at leasing or licensing their land to solar companies. Even in the absence of a guaranteed feed-in tariff (FIT) from the Government, attractive revenue streams in the region of €700 to €1,300 per acre are being discussed between farmers and solar development companies.
A definitive Revenue statement has not yet been issued on a number of tax-related aspects. However, some guidance is available and the Department of Agriculture has got confirmation that Revenue will allow favourable treatment of land for leasing in certain circumstances.
A typical solar PV development involves the installation of solar panels on approximately 20 to 25 acres of land together with ancillary work on roads, transformers, sub stations, etc. To look at the tax implications for the typical arrangement will involve the detailed analysis for the landowner of the various taxes involved. Prior to looking at the taxes, we must look at the Basic Payment Scheme (BPS).
BPS and solar PV
The Department of Agriculture, Food and Marine informed advisers at the recent FÁS training that the BPS will be payable on land occupied by solar panels. Payment will only apply where less than 70% of the land area is occupied by panels and other ancillary site features such as cabling, sub-station, roadways, etc. In most situations, the solar panels will only occupy 25% of the land area, which will leave 75% as forage area. If, for example, 10ha is occupied by solar panels, there will generally be 75% still available for grazing. This will require a reduction of 2.5ha on the forage area. The landowner in this situation may need to get additional land to utilise their full entitlements or may decide to sell or lease any excess entitlements to account for the forage area lost to the space occupied by the solar panels. The solar panel site may be grazed by sheep or mowed/topped to ensure the ground is farmed to good agricultural environmental conditions (GAEC).
Tax issue on BPS
If you have excess basic payments because of decreased forage or due to the construction of solar panels, your options are as follows:
Lease: The income will be liable to income tax at the marginal rate of tax together with PRSI and levies. Sale/gift: The proceeds will be liable to capital gains tax (CGT) as they are sold without land.Typical contractual arrangement
The arrangement is structured normally with a small option payment on signing up. This is followed by an annual option payment until the panels are installed and electricity is generated from the site. It is at this stage that the long-term lease kicks in. First of all, we must look at the lease premium if one is payable or an option agreement. A lease premium paid on the signing of a lease is subject to income tax and CGT where the lease is for less than 50 years. A premium received on the grant of a long lease (greater than 50 years) is not subject to income tax and the whole amount is subject to CGT as a part disposal. However, in most of these cases, the lease is for 25 years.
In some cases, an option agreement is put in place prior to the lease agreement coming into effect and there may be a payment to the landowner for the option. Initially, the option is treated as a separate asset to the land. On the grant of the option, the grantor does not make a disposal of the land; instead, a separate asset has been created that being the option which has a base cost of zero. If the option is exercised, the grant of the option forms part of the larger transaction and in most events will be treated as a capital payment and taxed under CGT.
Example: A farmer has 100 acres and decided to grant a solar company an option agreement on 25 acres. The solar developer usually will take this option for a period of five years in order to give the developer sufficient time to sort out grid connection, planning or investment issues prior to the electricity being generated on site.
If during this option period the landowner receives an annual payment of €150/acre, this will generate an income of €3,000 per annum on the 25 acres, which is subject to income tax of either 20% or 40% depending on the total income threshold earned by the landowner.
How tax works
Looking at the typical structure, Revenue has confirmed that the long-term leasing exemption may apply. It has stated “that for the purposes of the exemption farmland is defined as land wholly or mainly used for the purposes of husbandry. The land is occupied for the purpose of spacing solar panels and access is required for cleaning and maintaining them. The land is not used wholly for husbandry because there is a secondary purpose, ie energy. However, once it is occupied mainly for husbandry, then it may qualify for the leased land exemption”.
If 75% of the land is used for the purposes of husbandry, it passes the mainly test and the leased land exemption applies. It is important to note that between buffer strips and set-back from drains and hedgerows that sheep will still be able to graze approximately 90% of the land area, which also includes the area under the panels.
The key point in getting the leased land exemption is whether the land is leased to the solar panel people or licensed to them. Most solar companies prefer to license the land and are not prepared to engage in an agricultural activity to qualify the farmer for leased land exemption for tax.
If the land is leased to the solar company and if the solar panel company farms the land, then it is likely that all the income from the lease will be
covered by the exemption. If the land is licensed so that the solar panel developers can place the panels and then the farmer continues to farm the land around the panels, then it is not a lease and so it doesn’t qualify.If the land is leased to the solar panel enterprise and the land is used so as to satisfy the definition of farmland, which is land wholly or mainly used for the purpose of husbandry, any long-term income would be exempt. It is important to bear in mind that the definition is mainly and Revenue have stated that mainly is 75% of the land.
CAT business relief
Generally speaking, where land is leased no business relief will be available on it. In this regard, where the holding is leased to the solar company and the solar company does not qualify as an active farmer, then because at the date of the gift or inheritance business relief would not be available on this land the full value of this land would be liable to CAT. The solar company is not occupying the land for any business you as a landowner are connected with, so you will not be able to claim either CAT or business property relief.
CGT retirement relief
Farmland which has been leased for 25 years or less, but which was owned and farmed by the seller/transferor for 10 years ending on the date of the lease, can still qualify for CGT retirement relief provided that all the conditions are satisfied. However, the provision for allowing this relief on leased land specifically refers to farmland and we are relying on the clarification from Revenue for income tax whether that land regarded as being actively farmed would qualify for CGT relief. But if the land is transferred and the transferee keeps leasing the land, an issue could arise on a future lifetime transfer. The transferee would not have met the conditions of owned and farmed land for 10 years prior to a future transfer. This does not preclude the transferee at some stage transferring the land by way of will. No CGT arises on death.
Land valuation
The development of a solar project, including a grid connection and planning consent, will make your land valuable. Farmland has been going up in price since the recession which itself is a problem from a tax viewpoint. If you now have signed a lease agreement and, of course, the lease has a value as well, you are probably looking at land valued between €10,000 to €15,000 per acre.
VAT
Where the land is sold, VAT will need to be considered. Normally, VAT will only be a consideration where the land is developed for VAT purposes and this can be the case where work has been done to the land which materially alters the use of that land; in other words, land is no longer farmland as a result of the solar panels and is now commercial property.
As you can see, the tax issues around the solar panels are complex and clarification is awaited from Revenue.
Conclusion
With proper planning, reliefs can be achieved. This is a complex area and each case will have its own circumstances. Careful consideration is needed in relation to capital taxes. If you have not thought about tax planning in relation to solar projects, perhaps you need to speak to your accountant. We suggest you also speak to your solicitor to make sure they have all advised you of the inheritance tax consequences of signing solar leases.
Farmland that is leased can qualify for agricultural relief provided that it is farmed for six years after the gift or inheritance by an active farmer. Provided that the solar company carries out a farming operation and meets the definition of active farmer, agricultural relief should apply on the land. One would be following the same guidance on CAT as Revenue has given for income tax notwithstanding that Revenue has yet to clarify the CAT element of it.
If not wholly agricultural land, the issue that arises is whether Revenue deem this to be non-agricultural land or could it be deemed as a mixture of agricultural and non-agricultural land.
In this scenario, when the land is transferred the person would be taxed on the full value of each part and reliefs would have to be examined.
This may also have an effect on agricultural relief on the balance of the land as if this land was regarded as non-agricultural for the purposes of the test, it could lead to further implications. Under the Finance Act 2014 changes for agricultural relief apply. The following two-pronged test criteria must be met:
Asset test: Are 80% of your assets in agriculture?Land farmed or leased must be to an active farmer.In the context of preserving agricultural relief and leased land exemption under the active farmer conditions, it would be advisable to get proper legal advice in order to ensure that the solar panel company carries on the trade of farming and continues to lease the land.
An example of relief and no relief is shown in the table. Example: Tom owns 130 acres of land. He has leased out 30 acres to the solar company who will carry out the trade of farming. The son is at home farming and Tom is looking to transfer all to him.
Note: If the area under panels is treated as non-agricultural, this will lead to no relief on this part. It may be best not to transfer this part with the rest of the land.
There are a number of questions that farmers need answers on:
Is the amount of land taken out of agricultural production large enough to raise questions about whether the farmhouse or houses are still occupying sufficient land to meet the 80% agricultural relief threshold?Is the amount of land being leased insignificant enough that it can still be treated as part of the business assets and structured to still qualify for business relief?Should the solar park be run alongside, and as part of, the same business as the farming and other “trading” enterprises rather than the income treated separately?In whose name is any solar lease and where is the rent being paid into? The answer to this can result in widely varying tax outcomes, so consider the structure carefully before signing.Should a parent transfer lands which will be leased to a solar company in advance of signing up with a solar company because it is being occupied by someone other than a farmer under the terms of a lease and unlikely to qualify for agricultural relief?Will the lease push up the value of the land, which in turn pushes up the potential CAT bill?Will running sheep under the panels guarantee agricultural relief?As a consequence of signing the lease, have I exposed my farm to a higher tax bill for my children if I die during the lease period with the solar company?Can you guarantee that you will live more than 20 years? If you have just signed a solar lease and you can guarantee that you are going to live more than 20 years, there may be nothing to worry about – as long as you don’t also have to cover the cost of disposing of the panels at the end of the lease.How can I demonstrate to Revenue that an agricultural activity can be maintained on land where panels are sited to maintain the agricultural trading status of the land for agricultural relief purposes?Are the payments of up-front options subject to CGT?To read the full Renewables Focus, click here.
A new kid on the block in the green energy sector has resulted in many questions that have and will challenge tax professionals. Many farmers are looking seriously at leasing or licensing their land to solar companies. Even in the absence of a guaranteed feed-in tariff (FIT) from the Government, attractive revenue streams in the region of €700 to €1,300 per acre are being discussed between farmers and solar development companies.
A definitive Revenue statement has not yet been issued on a number of tax-related aspects. However, some guidance is available and the Department of Agriculture has got confirmation that Revenue will allow favourable treatment of land for leasing in certain circumstances.
A typical solar PV development involves the installation of solar panels on approximately 20 to 25 acres of land together with ancillary work on roads, transformers, sub stations, etc. To look at the tax implications for the typical arrangement will involve the detailed analysis for the landowner of the various taxes involved. Prior to looking at the taxes, we must look at the Basic Payment Scheme (BPS).
BPS and solar PV
The Department of Agriculture, Food and Marine informed advisers at the recent FÁS training that the BPS will be payable on land occupied by solar panels. Payment will only apply where less than 70% of the land area is occupied by panels and other ancillary site features such as cabling, sub-station, roadways, etc. In most situations, the solar panels will only occupy 25% of the land area, which will leave 75% as forage area. If, for example, 10ha is occupied by solar panels, there will generally be 75% still available for grazing. This will require a reduction of 2.5ha on the forage area. The landowner in this situation may need to get additional land to utilise their full entitlements or may decide to sell or lease any excess entitlements to account for the forage area lost to the space occupied by the solar panels. The solar panel site may be grazed by sheep or mowed/topped to ensure the ground is farmed to good agricultural environmental conditions (GAEC).
Tax issue on BPS
If you have excess basic payments because of decreased forage or due to the construction of solar panels, your options are as follows:
Lease: The income will be liable to income tax at the marginal rate of tax together with PRSI and levies. Sale/gift: The proceeds will be liable to capital gains tax (CGT) as they are sold without land.Typical contractual arrangement
The arrangement is structured normally with a small option payment on signing up. This is followed by an annual option payment until the panels are installed and electricity is generated from the site. It is at this stage that the long-term lease kicks in. First of all, we must look at the lease premium if one is payable or an option agreement. A lease premium paid on the signing of a lease is subject to income tax and CGT where the lease is for less than 50 years. A premium received on the grant of a long lease (greater than 50 years) is not subject to income tax and the whole amount is subject to CGT as a part disposal. However, in most of these cases, the lease is for 25 years.
In some cases, an option agreement is put in place prior to the lease agreement coming into effect and there may be a payment to the landowner for the option. Initially, the option is treated as a separate asset to the land. On the grant of the option, the grantor does not make a disposal of the land; instead, a separate asset has been created that being the option which has a base cost of zero. If the option is exercised, the grant of the option forms part of the larger transaction and in most events will be treated as a capital payment and taxed under CGT.
Example: A farmer has 100 acres and decided to grant a solar company an option agreement on 25 acres. The solar developer usually will take this option for a period of five years in order to give the developer sufficient time to sort out grid connection, planning or investment issues prior to the electricity being generated on site.
If during this option period the landowner receives an annual payment of €150/acre, this will generate an income of €3,000 per annum on the 25 acres, which is subject to income tax of either 20% or 40% depending on the total income threshold earned by the landowner.
How tax works
Looking at the typical structure, Revenue has confirmed that the long-term leasing exemption may apply. It has stated “that for the purposes of the exemption farmland is defined as land wholly or mainly used for the purposes of husbandry. The land is occupied for the purpose of spacing solar panels and access is required for cleaning and maintaining them. The land is not used wholly for husbandry because there is a secondary purpose, ie energy. However, once it is occupied mainly for husbandry, then it may qualify for the leased land exemption”.
If 75% of the land is used for the purposes of husbandry, it passes the mainly test and the leased land exemption applies. It is important to note that between buffer strips and set-back from drains and hedgerows that sheep will still be able to graze approximately 90% of the land area, which also includes the area under the panels.
The key point in getting the leased land exemption is whether the land is leased to the solar panel people or licensed to them. Most solar companies prefer to license the land and are not prepared to engage in an agricultural activity to qualify the farmer for leased land exemption for tax.
If the land is leased to the solar company and if the solar panel company farms the land, then it is likely that all the income from the lease will be
covered by the exemption. If the land is licensed so that the solar panel developers can place the panels and then the farmer continues to farm the land around the panels, then it is not a lease and so it doesn’t qualify.If the land is leased to the solar panel enterprise and the land is used so as to satisfy the definition of farmland, which is land wholly or mainly used for the purpose of husbandry, any long-term income would be exempt. It is important to bear in mind that the definition is mainly and Revenue have stated that mainly is 75% of the land.
CAT business relief
Generally speaking, where land is leased no business relief will be available on it. In this regard, where the holding is leased to the solar company and the solar company does not qualify as an active farmer, then because at the date of the gift or inheritance business relief would not be available on this land the full value of this land would be liable to CAT. The solar company is not occupying the land for any business you as a landowner are connected with, so you will not be able to claim either CAT or business property relief.
CGT retirement relief
Farmland which has been leased for 25 years or less, but which was owned and farmed by the seller/transferor for 10 years ending on the date of the lease, can still qualify for CGT retirement relief provided that all the conditions are satisfied. However, the provision for allowing this relief on leased land specifically refers to farmland and we are relying on the clarification from Revenue for income tax whether that land regarded as being actively farmed would qualify for CGT relief. But if the land is transferred and the transferee keeps leasing the land, an issue could arise on a future lifetime transfer. The transferee would not have met the conditions of owned and farmed land for 10 years prior to a future transfer. This does not preclude the transferee at some stage transferring the land by way of will. No CGT arises on death.
Land valuation
The development of a solar project, including a grid connection and planning consent, will make your land valuable. Farmland has been going up in price since the recession which itself is a problem from a tax viewpoint. If you now have signed a lease agreement and, of course, the lease has a value as well, you are probably looking at land valued between €10,000 to €15,000 per acre.
VAT
Where the land is sold, VAT will need to be considered. Normally, VAT will only be a consideration where the land is developed for VAT purposes and this can be the case where work has been done to the land which materially alters the use of that land; in other words, land is no longer farmland as a result of the solar panels and is now commercial property.
As you can see, the tax issues around the solar panels are complex and clarification is awaited from Revenue.
Conclusion
With proper planning, reliefs can be achieved. This is a complex area and each case will have its own circumstances. Careful consideration is needed in relation to capital taxes. If you have not thought about tax planning in relation to solar projects, perhaps you need to speak to your accountant. We suggest you also speak to your solicitor to make sure they have all advised you of the inheritance tax consequences of signing solar leases.
Farmland that is leased can qualify for agricultural relief provided that it is farmed for six years after the gift or inheritance by an active farmer. Provided that the solar company carries out a farming operation and meets the definition of active farmer, agricultural relief should apply on the land. One would be following the same guidance on CAT as Revenue has given for income tax notwithstanding that Revenue has yet to clarify the CAT element of it.
If not wholly agricultural land, the issue that arises is whether Revenue deem this to be non-agricultural land or could it be deemed as a mixture of agricultural and non-agricultural land.
In this scenario, when the land is transferred the person would be taxed on the full value of each part and reliefs would have to be examined.
This may also have an effect on agricultural relief on the balance of the land as if this land was regarded as non-agricultural for the purposes of the test, it could lead to further implications. Under the Finance Act 2014 changes for agricultural relief apply. The following two-pronged test criteria must be met:
Asset test: Are 80% of your assets in agriculture?Land farmed or leased must be to an active farmer.In the context of preserving agricultural relief and leased land exemption under the active farmer conditions, it would be advisable to get proper legal advice in order to ensure that the solar panel company carries on the trade of farming and continues to lease the land.
An example of relief and no relief is shown in the table. Example: Tom owns 130 acres of land. He has leased out 30 acres to the solar company who will carry out the trade of farming. The son is at home farming and Tom is looking to transfer all to him.
Note: If the area under panels is treated as non-agricultural, this will lead to no relief on this part. It may be best not to transfer this part with the rest of the land.
There are a number of questions that farmers need answers on:
Is the amount of land taken out of agricultural production large enough to raise questions about whether the farmhouse or houses are still occupying sufficient land to meet the 80% agricultural relief threshold?Is the amount of land being leased insignificant enough that it can still be treated as part of the business assets and structured to still qualify for business relief?Should the solar park be run alongside, and as part of, the same business as the farming and other “trading” enterprises rather than the income treated separately?In whose name is any solar lease and where is the rent being paid into? The answer to this can result in widely varying tax outcomes, so consider the structure carefully before signing.Should a parent transfer lands which will be leased to a solar company in advance of signing up with a solar company because it is being occupied by someone other than a farmer under the terms of a lease and unlikely to qualify for agricultural relief?Will the lease push up the value of the land, which in turn pushes up the potential CAT bill?Will running sheep under the panels guarantee agricultural relief?As a consequence of signing the lease, have I exposed my farm to a higher tax bill for my children if I die during the lease period with the solar company?Can you guarantee that you will live more than 20 years? If you have just signed a solar lease and you can guarantee that you are going to live more than 20 years, there may be nothing to worry about – as long as you don’t also have to cover the cost of disposing of the panels at the end of the lease.How can I demonstrate to Revenue that an agricultural activity can be maintained on land where panels are sited to maintain the agricultural trading status of the land for agricultural relief purposes?Are the payments of up-front options subject to CGT?To read the full Renewables Focus, click here.
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