Landowners advised to carefully consider tax implications for solar and wind farm renewables by Ifac
Ifac, Ireland’s leading farming, food and agribusiness professional services firm, is encouraging all landowners in Westmeath considering ‘option agreements’ with solar/wind farm companies to carefully consider all the legal and tax considerations before signing up.
This article is attributable to Declan McEvoy, Head of Tax at ifac.
Ifac advises Westmeath landowners to carefully consider legal and tax implications of renewables
2020 has led to an increased interest in solar and wind farm companies looking to enter into option agreements with landowners to acquire their land to potentially erect solar panels or wind turbines.
Whilst great in theory and leading to a potential game-changer for the agri-sector and its contribution to the reduction in carbon emissions, ambiguity exists about some of the tax treatment of the renewables.
The typical contract that a solar/wind farm company is looking to enter into with the landowner is broken down into several sections and needs careful legal and tax consideration.
On examining the agreement and before signing the same remember that, as the landowner, you will have the potential to extract funds from the renewable company for:
Professional fees contribution other than legal, e.g. tax consultancy
Signing on fee
Fee when planning granted
Commercial annual lease amount.
Also, do not lose sight of the potential succession issues around the possibility of disqualifying the land as an ‘agricultural asset’.
The first part is the option agreement to lease the land, whereby the company will look to enter into a binding option agreement with the landowner.
In effect, this binds the landowner on the terms as agreed to lease the land to the company once certain conditions have been met by the solar/wind company.
The tax treatment of an option is treated as a disposal for capital gains tax and the ultimate treatment depends on whether the option is exercised or not. If the option is exercised, the option agreement merges with the lease and can be deemed to be a premium on a lease thus liable to a mixture of capital gains tax and income tax.
If the option is not exercised, the tax treatment is that it is liable to capital gains tax at 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 several years whereby 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 the option is exercised and the annual income stream starts to flow the income you, as the landowner, receives is liable to income tax.
Examine your personal situation and look at the options available to minimize the income tax.
Several tax planning opportunities include:
Paying max pension against other trade income
Possibly incorporating your business
Possible transfer of land incorporation of the land area being leased to the renewable company.
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/sell within five years of development thus requiring a clear succession plan 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 potential for tax arises. While tax laws were changed to encourage solar no such law change applied to wind farms, and there is a lack of uniformity between Revenue and the Department of Agriculture.
The two reliefs affected are:
Cat -agricultural relief.
Finance Act 2017 and guidance notes extended the definition of agricultural property to include “the total amount of land on which any solar company has exercised its option to install solar panels must not comprise of not more than 50% of the total area of land in the gift or inheritance.”
Revenue’s position is that the total area is the full land area and not merely the footprint.
However, this ‘area’ can lead to confusion as the Department of Agriculture will be looking at:
What is half the land, as stock can graze in and around the panels?
Will the Department of Agriculture basic payment section treat it as utilizable area as expressed when it was single farm payments?
What percentage will they deem to be farmland?
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, as well as sound legal advice and consider all the options for you.
Renewables are a wonderful source of funds for your farm and even with tax issues may still be the best alternative.