INHERITANCE TAX (IHT) CONSIDERATIONS

There are usually three main phases to renewable energy schemes that, if considered with the right professional advice, offer an opportunity to astutely plan for IHT from the earliest stages.

1. STRUCTURING

Taking the time to structure the business appropriately at the outset, (including who/what is the best entity to own the land/asset on which the proposed scheme will occupy), can be hugely beneficial further down the line. There are a number of potential options for restructuring an existing farm business, often linked to how the business will be financed. The ultimate aim is to structure the business in such a way that will maximise tax reliefs but also provide flexibility for future growth and development.

2. DEVELOPMENT AND INSTALLATION

Most renewable energy businesses will require significant upfront expenditure with returns spread over a longer period of time (usually linked to the life expectancy of the equipment or the lease length). It is essential to consider the treatment of the forthcoming income to ensure you maximise tax reliefs where possible.

3. OPERATION

Once developed, the operation can generate regular returns, often with minimal running costs, plus there is an asset with a tangible value.

As a landowner you need to ensure that the land continues (where possible) to qualify for one of the exemptions from IHT, and you will not want your renewable energy activity to jeopardise that.

A renewable scheme with active involvement from the landowners on the land helps to maximise the use of Business Property Relief as this reinforces that there are the 'badges of trade' to help achieve the Business Property Relief argument.

Alternative Options

A somewhat simpler approach to renewable energy projects is to lease the site to a renewables company and benefit solely from the lease income. This would usually be taxable in the same way as any other rental income and is likely to incur income tax. As this is a commercial lease and not an agricultural use, the Agricultural Property Relief from IHT may be lost. However, Business Property Relief from IHT may still be available, providing this rental income makes up an appropriately proportional part of the total farm business income.

An alternative, and increasingly popular approach, is to enter a joint venture with a renewables company which, from HMRC’s perspective, will require you to demonstrate that you are sharing in both the profits and the losses of the business activities.

Each approach will have different tax treatments and requires specialist accountancy advice.

Professional Advice

With so much to consider before embarking on a renewable energy project, it is essential to seek early consultation with your agent and other professional advisors prior to any scheme commencement, to ensure the maximum income is balanced against future tax implications.