23 Dec, 2021

Why tax planning matters when it comes to wind and solar farms

When it comes to wind and solar farm developments on farm land, getting tax planning wrong can make the development unviable writes our tax team.

Solar panels and wind turbines on a farm can change the dynamic of the income coming into the household.  A solar farm development can generate leases in the region of about €1,000/ac per. While leasing farmland for wind turbines can generate on average between €25,000 and €35,000 per turbine per year.

This can be significant on any farm and is a welcome addition to the income pot.

However from an income tax point of view, this income is added with all other income and is subject to income tax.  There really isn’t an issue here as everyone has to pay income tax on the money.

However there can be significantly bigger tax impacts to your farm and this can sometimes be ignored. 

The implications on capital taxes or succession/estate planning tax, which can be incurred when transferring the farmland to the next generation, can often be overlooked.

Future generations

While a farmer may look at this development as extra income for the business, they can forget about the potential problem created if the land is being passed onto the next generation. 

If it is not being passed on during their life and they expect to live for most, if not all of the full term of the agreement then no major problem arises. 

However, if they aim to transfer the farmland during their life, particularly in the early years of a solar farm or wind turbine being erected, a potential problem arises in terms of the eligibility of tax reliefs for that land.  If not properly planned and managed, it could make transferring or inheriting land unviable.

The two reliefs which may be affected are retirement relief for capital gains tax (CGT) and agricultural relief for Capital Acquisitions Tax (CAT).

If the farmer is over 55 years of age they might be able to claim retirement relief on CGT when transferring any part of your business or farming assets.

When transferring land through gift or inheritance, agricultural relief reduces the taxable value CAT of the land being transferred by 90%.

Solar vs wind

As of 1 January 2018, the government introduced a relief on farm land which contain solar panels. The land is now deemed as a qualifying asset, i.e. eligible to gain relief provided “the area of the land on which the solar panels are installed does not exceed half of the total area of the lands concerned”.

Therefore it is vital that the amount of land (i.e. map area) used by the solar farm is under half of the total land area being transferred in order to qualify for agricultural relief.

In simple terms if you have 100ac of land and 49.99ac is used to develop the solar farm, as long as the other 50.01ac is farmed and you meet the other conditions then relief is available from both capital gains tax and capital acquisitions/gift tax when the land is transferred.

Whilst this relief exists for solar, land used for the development of wind turbines do not qualify for this. 

Table 1. Relief v no relief – solar farm comparison

Insert table 1

As table 1 outlines, with relief, little or no capital tax arises when transferring the land once the solar farm development is below 50ac. Stamp duty could apply depending on the circumstances however and would need to be examined.

However, if 51ac was used to develop the solar farm and 49ac was farmed the land would no longer be eligible for relief and a tax bill of over €750,000 would be occur.

Grazing under panels

While the legislation states that are installed the land on which the solar panels are installed does not exceed half the total area

It is often the case that the land underneath the solar panels is being farmed but this is not included as “farmed land” based on the government’s definition.

So while the solar farm may take half the land on paper, in reality it might may be considerably less. This is a serious anomaly.

 Table 2. Tax implication for wind turbines

As table 2 outlines, wind turbines do not qualify for the same reliefs which solar farm developments enjoy.

While proper planning may help and may minimise the tax bill, it will not eradicate it. In this example, two wind turbines on 100ac of land would result in a tax liability of over €700,000.

Comment: Clarity and common sense

Without some change in tax legislation to encourage solar and wind developments, farmers may be reluctant and maybe advised not to enter into arrangement with developers.

If a farmer transfer and the property and doesn’t qualify for relief, the next generation will have to pay income tax and capital taxes out and this could leave them worse off.

The use of land for solar and wind developments surely falls in under alternative land use and farmers should be encouraged to be part of the solution not the problem.

Common sense, good advice and planning can help minimise tax issues. Making farmers aware of the bigger issue is important but it doesn’t necessary mean the problem goes away. Only a change in tax legislation can do that.