Renewable Energy Projects and Inheritance Tax
The current economic climate, linked to various Government incentives, is making landowners consider whether to enter into a renewable energy scheme to maximise returns. Most landowners are linking up with developers, and will usually consider the direct tax implications, such as income tax and VAT, but how many will also stop and think about inheritance tax? The answer is, in our experience, not many.
As a result of placing a renewable energy project on the land, the value of that land will be increased, which in turn will increase the exposure to inheritance tax.
Overview of the position
The value of land, including any structures owned on the land, is potentially subject to inheritance tax at 40% on the death of, or gift by, the landowner. However, there are two key reliefs that can apply to mitigate this.
Agricultural Property Relief (APR) may be available if the land is used for agricultural purposes. APR only applies to relieve the agricultural value of land: agricultural land that has additional value through development could therefore still potentially be exposed to inheritance tax if no other relief is available.
Business Property Relief (BPR) will be available if the land is used in the landowner’s business. There are other several other conditions to be met. The main one to take into account is that HM Revenue & Customs will not accept a claim for BPR if the business in question is “wholly or mainly that of making or holding investments”. This therefore prevents most land or property that is let to third parties from qualifying for BPR.
However, a landowner carrying out the business of generating and supplying electricity should be able to claim BPR on the full value, including any development value, of the assets used in their business, including the land on which the business is situated.
The problem that arises is the question of whether the landowner is involved in the day to day carrying on of a business, or whether his activities are really that of a landlord purely in receipt of rental income. The answer will be found in the agreement between the landowner and developer. More detail on what constitutes a trading business in these circumstances is set out below.
More often than not, the landowner will enter into a joint venture with the developer, usually for a fixed period of time, and with an upfront agreement over how the joint venture will operate, covering areas such as capital contributions and profit sharing arrangements.
There are various other legal and commercial issues that need careful consideration before entering into any agreement. There are also tax implications in entering an agreement, such as potential Stamp Duty Land Tax and the availability of capital allowances on the costs. This paper does not focus on these areas, but if you require assistance, we can help.
Once the JV agreement has been implemented to reflect the risk and reward for the landowner, it is then essential that both parties adhere to the agreement.
What constitutes a trading business?
HMRC will not provide any form of advance assurance that an individual is actively carrying on a trading business as opposed to an investment activity. The test will only therefore ever be applied retrospectively, when a potentially chargeable event occurs. Therefore the onus is on the landowner to take as many steps as possible to demonstrate the fact that they have been actively involved in a commercial business. There is no specific list of factors to consider, but common points include the following:
- If possible, ensure that the contracts for development, invoices and all operating costs are in the name of the joint venture
- Arrange meetings, at least annually, between the landowner and the developer, to consider the business, and review performance and forecasts
- Prepare and submit partnership/joint venture accounts and tax returns
- Register the business for VAT, where appropriate
- Register the trade with HMRC and start paying Class 2 National Insurance Contributions
- Keep a diary of time spent on the business (landowner)
- Provide personal contact details for an emergency contact list, and expect to be called to be the first point of contact for an emergency (landowner)
Many landowners will not be willing to give up the security of a guaranteed rental income on fields, or to commit the time and effort to a new business venture. However, for those few who are willing to accept the commercial risk and dedicate their own time and capital to a renewable energy business, an inheritance tax shelter may be achievable.
For more details on this or any other tax matter please contact Brian Garner, Director of Tax on 01392 687662 or firstname.lastname@example.org