The Barleymows – A solar park?

George, Mary and David are in the farmhouse having a morning coffee when Henry wanders in with a smile on his face…

David:  Morning Dad, everything ok?

Henry: What a glorious day! This sunshine is just what we need at the moment after all this dull, cold weather.

David:  Funny you should mention sunshine, look at this letter.

Henry:  (frowns): Solar park. What’s that got to do with us?

David:  They are saying that we are in an excellent location with a good grid connection nearby. I’ve done some research and it looks like the annual return per acre from a solar park could be well in excess what we currently make from farming the land. They are keen to go for planning permission for a 150 acre site that would operate for 40 years!

Henry: This all sounds very interesting but look at the price of wheat at the moment. We don’t want to take good land out of production.

David:  But let’s not forget how much our input costs have increased and there is also the reduction in BPS.  Not to mention the cost of updating our kit. Something like this would give us a steady stream of income to balance against the ups and downs on the farm.  It could give us some real security over the coming years.

George:  But we don’t know anything about running a solar park!

David:  I don’t think we need to. These people will deal with everything and then rent the site from us.  It looks like they will pay for the planning process so we shouldn’t have to risk any money upfront.

George:  Well, when you put it like that, I suppose there is no harm in exploring it.  A steady rent coming into the farm would make life easier.

Mary:  Isn’t there a problem with Inheritance Tax if we start renting out land?  I am sure I remember something about that. I thought it was important that we keep farming all of the land?

David:  That’s a good point Mum. I had a quick chat with Ensors and they mentioned that. But they said that there are a few options. If it is the partnership that rents the land and it remains part of the wider farm business, it may continue to qualify for Business Property Relief (BPR) which protects the value from Inheritance Tax.

Mary:  That doesn’t sound as safe as the land being farmed.

David: It definitely complicates things.  Ensors have said that they would need to review this with our solicitors.  They said that it is important that the land in question is owned by the partnership and that farming continues to be the biggest part of the business (based on turnover, profit, asset values and management time).

Henry: It sounds risky to me.  Looking at where they are talking about having the site, it is probably going to be on land that your granddad owns.  We don’t want to lose the Inheritance Tax protection on that.  Presumably the value of the land would go up as well with all that rent coming in?

George:  We definitely don’t want to be paying Inheritance Tax on the land.  That would be 40% of the value!  Can’t I just give the land to you David?

David: That is another option. Usually gifting an asset means that you have to pay Capital Gains Tax (CGT) as if you had sold the asset for its market value.

George:  I don’t like the sound of that – they tax everything these days!

David: Don’t worry, that isn’t the end of it!  As long as the gift is made while the land is still being farmed, we can claim holdover relief which will mean that there won’t be any CGT.  This means that I will be agreeing to pay the CGT should I sell the land in the future one day and I would only be able to deduct your base cost.

Henry: Your granddad has owned that land for a long time.  The base cost will be very low so there would be a lot of CGT to pay were you to sell the land one day, David.  If you inherit the land from granddad instead, I think your CGT base cost becomes the probate value meaning that you could then sell the land without paying much CGT at all.

David: That’s a good point Dad but I’ve got no intention of selling anything so I’m not too worried about that.

George:  Glad to hear it!

Mary:  So if George gifted you the land, would that mean it would be safe from Inheritance Tax?

David: It will be once 7 years have passed from the date of the gift, as long as granddad doesn’t continue to benefit from it.

George: What if I don’t survive for 7 years after making the gift?  I’m fighting fit at the moment but you never know what’s around the corner.

David: As long as we get the structure right, we would still hopefully be able to make a claim for BPR like we were talking about earlier.

George:  I like the sound of that – always good to have a backup plan.  It sounds like the sooner I give you this land the better. Although if I can’t continue to benefit from the land after the gift, does that mean I don’t get the rent?

David: Afraid not Granddad – you’ve still got your state pension though! (They all laugh).

Henry: I suppose the other problem is that you will end up paying lots of tax on the rent each year?

David: Yes, Ensors did mention that as well. We will have to crunch some numbers and it will depend on lots of different factors, i.e. how the extra income ends up being spread between us, how profitable the farm is etc. They did say that putting more money into pensions where possible would help. They also mentioned some slightly more complicated ideas involving either a trust or a limited company.

Henry:  It sounds like there is a lot to think about then. I suggest we arrange a meeting to discuss this in a bit more detail…