Renewable energy investment on farm: What to expect and what to avoid

Producing clean electricity is predicted to one day outstrip rural tourism as a secondary income for UK farms.

Interest in investing in renewables or leasing sites to developers is high, from small- and large-scale solar and battery storage to wind turbines and anaerobic digestion (AD) plants.

Hampshire arable farmer Nick Russell was approached by 200 solar developers before he leased land to Conrad Energy as a battery storage site.

See also: NI farm transforms slurry and food waste into bio-LNG fuel

At a recent Farmers Weekly event on his farm near Winchester, Hampshire, experts offered advice on what to consider and some pitfalls to avoid.

Tax

Land used for a farming trade benefits from important tax reliefs, but these can be lost without the right business structure or when the size of a renewables project dwarfs farming activities.

If the landowner receives the income personally, it could be subject to additional rates of income tax and, at high levels, restrict their tax-free personal allowance, warned tax adviser and accountant Kate Hardy, of Albert Goodman.

How the business is structured is key to getting the best tax position. A sole trader or those in a family partnership will be taxed on the income personally, whereas in a company structure the income will be taxed on the company, potentially at a lower rate.

The figures involved can be substantial. In simple terms, a 35-year solar project earning £100,000/year would generate income of £3.5m, said Kate.

“If taxed on you personally and assuming you already receive £30,000/ year, at 2023-24 rates and allowances the additional tax liability would be £1.443m,” she calculated.

In a company structure, this reduces to £796,000, equating to a tax saving of £647,000.

To establish the project within a company, Kate advised that the project land is sold to the company – in most circumstances at the open market value (OMV).

Capital gains tax (CGT) would be payable on the net gain, but the proceeds in the company could be drawn down tax-free.

Alternatively, if it is gifted to the company this is still a disposal at OMV, but if the land qualifies for agricultural property relief (APR) from inheritance tax (IHT), holdover relief can be claimed and there is no immediate CGT charge.

“This does then mean funds aren’t available to draw down in the company, so a mix of the two options is normally preferable,” Kate suggested.

Care should be taken to ensure stamp duty land tax implications have been considered and reliefs are available.

“You also need to ensure the transfer doesn’t result in an immediate charge to inheritance tax under the chargeable lifetime transfer rules – hence the need to include professionals from the start,’’ said Kate.

A solar farm or battery storage site is not classed as being occupied for the purposes of agriculture, so APR would be denied.

This can result in a significant tax liability. Without APR, land that doubles in value to £20,000/acre as a result of development will have a potential IHT liability of £8,000/acre.

If it fails to qualify for APR, it then can’t be gifted tax-free, so there would also be a CGT liability of £4,000/acre.

“With income of £1,000/acre, it could take 13.5 years of net income to pay the IHT,’’ Kate explained.

Business property relief (BPR) does not apply if the business consists wholly or mainly in dealing with land or holding investments and, as the lease of a solar farm or battery storage site is treated as “holding an investment”, BPR would also be denied.

However, if it can be established that the business is mainly trading, in principle there is no reason why its full value should not qualify for BPR, said Kate.

She advised landowners considering a renewables project to obtain advice from the outset to help mitigate the tax and safeguard their IHT position.

Legal

Projects are mostly done in three stages, starting with negotiations and heads of terms, followed by agreeing the contract and ending with completion, usually culminating in a lease being granted.

Mark Charter of law firm Thrings said it was vital to get the right advice when negotiating heads of terms.

“Landowners sometimes sign heads of terms without advice simply to crack on with the project, but if they get the commercial terms wrong at that stage, those mistakes can be magnified over 30-40 years, across the lifetime of the lease.”

When it comes to exclusivity agreements, with the landowner agreeing not to talk to other developers for a set period, Mark recommended this should be no longer than three months.

“If you break the exclusivity obligations, you may well have to pay the solar operator’s costs and they can be significant,” he said.

At the contract stage, the landowner should request a clause indemnifying them against loss if the operator causes damage when accessing the site for surveys and other work that can’t be made good.

As there can be a three-year gap between a contract being signed and the site becoming operational, to protect future revenue Mark advised that minimum rent requirements should be specified to avoid the landowner being forced to trade at below market rents.

A clause requiring a “turnover” rent is also recommended to account for advances in technology, which will earn the developer more income – Mark said he was typically seeing 4-6% turnover rents. 

This means that when, for example, 6% of the developer’s revenue from the installation exceeds the acreage-based rent, the landowner is paid a top-up between the two figures.

The contract should also include a clause specifying a minimum acreage acceptable to the landowner for the project.

“If the operator gets planning on only a small acreage, the disruption to the farm might make the project not worth it for the landowner,” said Mark.

Landowners should also reserve the right to exploit future natural capital benefits from the site.

A remediation fund, also known as a “sinking” fund, built up by the developer and which the landowner can resort to, is essential to cover the cost of restoring the land to its pre-development position, as the costs associated with this can be significant.

“It gives the landowner comfort if the developer fails to carry out remediation or goes out of business,’’ said Mark.

Such funds are usually built up over the 10-15 years before the lease expires.

Grid connection

A major constraint to renewable energy development is grid capacity – if a connection can’t be established, the project is a non-starter.

George Hall leads on “front of the meter” renewable development for Conrad Energy and is optimistic that this is changing.

He reckoned that the first quarter of 2024 would see an increase in the number of operators securing connections.

Distance between the site and an electricity sub-station is a factor when developers consider sites.

George said up to two miles was considered workable, but it depended on what sits between the site and the sub-station, with fields being more favourable than a highway. 

For battery storage sites, import and export connections are needed. Rental values for battery sites broadly range from £1,750-£2,000/MW, or £15,000-£25,000/acre, depending on access, layout, screening and planting.

When choosing a developer to work with, George said it was important that it had a good track record, was well financed and experienced in multiple technologies.

Case study: Down Farm, Hursley, Hampshire

Nick Russell, host farmer for the event, opted for battery storage over solar because of its smaller land requirement.

His warning to landowners contemplating energy projects is to “be careful who you get into bed with’’.

The agreement with the developer he initially signed up with didn’t work out and, in October 2021, that project was bought by Conrad Energy.

Nick said he was pleased with how the project had subsequently progressed, with very little interruption to day-to-day farming and the company delivering what it said it would.

Getting good advice at the start is important. “Before you sign anything, you need to know what you are agreeing to.

“The developer often pays for the advice, so it is worth getting an experienced, top-quality solicitor or land agent involved.’’

Ensure the developer selected has sufficient funds to carry the project through. “There are some that can’t go through with what they have promised,’’ said Nick.

Preserving the right to the grid connection is also vital. “You need to own the connection or have an agreement in place stating that if it all goes wrong, you get it back – the connection is what is worth the money.’’

Planning can be a hurdle. “No one can see our site, but it still had lots of objections,’’ said Nick.