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A Sunny Addition to any Business
Whilst we are all aware that demand for solar farms is on the increase and developers are continuing ever further North in their pursuit for suitable sites, it is becoming apparent that a number of pitfalls exist for the unwary landowner.
In general, the addition of a solar farm to any agricultural business should be wholeheartedly welcomed especially since headline rents of up to £1,000/acre can be achieved, while a drive towards an agricultural future which is carbon neutral has reinvigorated this sector. Falling panel prices and rising electricity requirements have all helped to stimulate demand whilst a blossoming sector of electric vehicles will continue to fuel growth.
Focus is now turning back to Grid Connections and we appear to be entering a period reminiscent of the last renewables boom when OFGEM connections were bought up by the dozen even before Planning Permission was approved, or in some instances, even before Landowners had been approached. The Grid Connection became the single biggest factor in realising a suitable site with connection delays commonplace and a congested marketplace.
As such, it points to the most important factor being that of location. A south-facing, free-draining, readily accessible site with an adjacent grid connection must be properly promoted in order to achieve the highest possible rent.
Exclusivity Agreements will normally be entered into to allow developers time to apply for a grid connection and, following a successful offer, the landowner will enter into an Option Agreement although the developer may offer an Option Agreement up front.
Whilst advice should be sought early before anything is signed, careful consideration must be given to the tax position of the business, especially if a sale or death is imminent.
Even though solar panels are elevated off the ground and the ground below can be grazed by sheep, the value of the lease, which is of a commercial nature, does not qualify for Agricultural Property Relief, even if the land below might still partially qualify depending on use.
Not all is lost however, and Business Property Relief may be available if the rental income from the solar farm only contributes a small element towards the total trading income of the business. Whilst this is unlikely to affect larger farming businesses, it could have a significant effect if a small farm is losing a large area to a solar farm, possibly changing the appearance of the farm for APR, especially if the farm then becomes unviable as a standalone unit.
Succession planning becomes key, and since Solar Farm leases are likely to be in excess of 30 years, conversations between generations need to take place before any increase in value is attributed to the land proposed for a Solar Farm.
Assuming the Solar Farm has been carefully planned after detailed discussions with Land Agents and Accountants, it might be recommended that the land be moved into a Limited Company (or similar) or simply transferred to a child or grandchild before any Planning Permission is approved. Once Planning Permission is approved, a grid connection confirmed and the lease signed, the value of the site will have increased significantly when compared to the base agricultural value.
Assuming a base agricultural value of £10,000/acre for good agricultural land and an annual rental income of £900/acre for a period of 30 years, the total projected income (excluding any RPI increase) would be £27,000/acre. Offering this site as part of a farm sale would then mean that the base agricultural value would be discounted to account for the presence of the solar farm lease and then the income from the lease valued on an investment basis. Depending on the length of the remaining lease, the value of the land may have increased by 50% or more, further highlighting the importance of careful tax planning.
Offering a farm for sale with a large Solar installation will generate significant outside interest, particularly if the solar farm lease is offered as a standalone lot. At present, the rents offered for sites can include performance bonuses, much like wind farm leases with a guaranteed minimum return. With the price per Megawatt increasing and the continued drive towards electric vehicles, it is likely that demand for sites will continue to grow.
If you are approached by a development company or would like an informal discuss regarding the possibility of a scheme on your land, please contact us and we will be happy to discuss with you.