The agricultural sector in the UK has been significantly impacted by the recent changes to Inheritance Tax (IHT) rules, announced by the Chancellor in October 2024.
For many farming families, passing land and assets down through generations has long been a tradition. But new rules introduced in the October 2024 budget that reduce Agricultural Property Relief (APR) and Business Property Relief (BPR) on the inheritance of farmlandwill require additional financial planning by farming families looking to remove liabilities that, in some cases, may cause them to sell land to cover Inheritance Tax (IHT) liabilities.
Looking at their options landowners can, however, consider leasing their land for the development of new renewable energy projects – such as solar or battery storage – to help provide a new income to offset future IHT considerations.
In the past, smaller landowners and farmers may have hesitated to lease land for solar energy projects, as these developments would fall outside the scope of APR and BPR, but with the need to consider new opportunities for additional revenues, landowners and their business advisors have an opportunity to look afresh at new sources of diversified income.
The Inheritance Tax Changes
The Chancellor’s announcement brought stricter guidelines on Inheritance Tax exemptions for agricultural land. Previously, both APR and BPR provided significant tax relief, with up to 100% exemption for qualifying land and assets. However, the new legislation has narrowed the scope of these exemptions, limiting full 100% APR and BPR relief to the first £1 million of a farm’s value, declining to 50% thereafter.
Under the new rules, only land actively used for agricultural purposes at the time of inheritance will qualify for relief, and more stringent rules have been introduced for land with non-agricultural uses.
For farming families who rely on inherited land to sustain their businesses, these changes increase the risk of selling part of their estate to cover the tax bill.
How Solar Projects Can Help
While it should be noted that the Government has stated that it will provide further clarity on its measures through an additional technical consultation in early 2025, landowners may wish to look at the following options to consider preliminary routes forward:
1. Revenue Generation and Financial Planning: Solar developments primarily offer long-term, reliable income through land lease agreements. This steady income can help farmers cover operational costs, reinvest in their farming operations, and create a financial cushion for the future. In planning long-term to manage an increased IHT burden, income from leased land may be set aside and invested to minimise future land sales.
2. Maintaining Agricultural Activity and Supporting Diversification: Solar panels can be installed on land in ways that continue to support agricultural activities. For example, panels can be elevated above the ground, allowing for grazing or farming beneath. This enables the land to retain its agricultural status, potentially qualifying for APR, while creating an additional income stream through solar energy production. ILOS optimises its projects for combined agrivoltaics, giving landowner partners the opportunity to maintain relief, where applicable.
3. Business Property Relief (BPR) Eligibility: Solar projects operated as part of a wider farming business may qualify for BPR, potentially providing IHT relief on qualifying business assets. If set up correctly, the income from solar farms can be treated as part of the farming operation, helping to keep the land within the family and reducing the tax burden.
Practical Steps for Farmers Considering Solar
If landowners have assessed that they can secure new revenue opportunities that balance their IHT liabilities, then the following steps are recommended:
1. Assessment and Planning: Farmers should start by consulting a reputable solar developer (one registered with the trade association – Solar Energy UK, the CLA or NFU) who can help them assess their land’s suitability for solar development. Factors such as sunlight exposure, grid connection access, and local planning regulations will play a crucial role.
2. Structuring for Tax Efficiency: To optimise tax benefits, farmers should seek expert legal and tax advice. This may involve setting up separate legal entities for solar operations or ensuring the land use complies with APR and BPR guidelines.
3. Partnering with Reputable Solar Developers: ILOS offer landowners a number of partnership models to secure the best return for their business from solar project development. Landowners can choose to benefit from long-term lease payments over the lifetime of the project, or a lump sum payment based on three to ten years of land rental and uplifted by the overall net profitability of the project where possible. Both financial models are geared towards enabling landowner partners to secure diversified income, which they can use to reinvest back into their businesses and secure their livelihood in the long-term, or used to make immediate investments or payments.
Additionally, to support landowners in managing their IHT liabilities, ILOS offers tax consultations to farmers up to £500.
Supporting British Farmers and Landowners
The changes to IHT rules present a significant concern for UK farmers, but investing in solar energy offers a strategic solution. By incorporating solar development, farmers can maintain the agricultural use of their land, generate reliable income, and potentially reduce their tax liabilities. As the renewable energy market continues to grow, this ILOS approach provides a way to safeguard family farming legacies while supporting the UK’s transition to a greener future.