The UK is committed to reaching net zero by 2050, which has led to a growing number of renewable generation and energy storage projects.

Whilst these present an opportunity for landowners to diversify their income streams (as well as contributing to the UK’s net zero goals), they also raise important tax issues for the landowners, particularly in relation to inheritance tax (IHT).

IHT is typically payable at a rate of 40% on the death of the owner (subject to tax allowances).

There are currently two key reliefs which can help landowners mitigate their IHT liability: Agricultural Property Relief and Business Property Relief.

Agricultural Property Relief

Agricultural Property Relief (APR) is a relief from IHT which applies to the transfer of qualifying property.

To qualify, the land must meet specific criteria:

  • It must be used for agricultural purposes. This is not defined in the IHT legislation and so we must rely on guidance from other areas of law and HMRC’s views, but generally it includes growing crops and grazing livestock.
  • It must have been owned for at least two years if occupied by the owner, a company controlled by them or their spouse[1], extended to seven years if occupied by someone else.
  • It must not be subject to a binding contract of sale on disposal e.g. certain buy and sell agreements.

APR is given at either 100% or 50% of the agricultural value of the asset, which may be lower than its market value, especially if there is development potential.

Business Property Relief

Business Property Relief (BPR) is a relief from IHT which applies to the transfer of relevant business property and can be claimed on:

  • A business or an interest in a business e.g. a sole trading business or partnership
  • Unquoted shares
  • A holding of shares or securities which are fully listed on a recognised stock exchange which give you control of the company

Land, buildings, plant or machinery owned by a partner or controlling shareholder and used wholly or mainly in the business or the partnership or company immediately before transfer

To qualify, the business property must also meet the following conditions:

  • The person must have owned the business interest or assets for more than two years
  • It must be carried on for gain
  • It must not consist of wholly or mainly prohibited activities i.e. dealing with securities, stocks or shares, dealing with land or buildings, or making or holding investments
  • It must not be subject to a binding contract of sale on disposal e.g. certain buy and sell agreements.

BPR is given at either 100% or 50% of the value of the asset being transferred.

Proposed inheritance tax changes from 6 April 2026

Following the budget on 30 October 2024, it is anticipated that the government will start consultation of APR and BPR in early 2025 with a view to bringing in the following changes on 6 April 2026:

  • APR and BPR (together) at the rate of 100% will only be available for the first £1 million of qualifying assets.
  • If an individual owns APR and/or BPR qualifying assets valued at more than the £1 million allowance, then the allowance will be applied proportionately across the qualifying assets.
  • If the allowance is exceeded, then the maximum relief available is 50% on the excess.
  • Assets automatically qualifying for 50% relief will not use up the £1 million allowance.
  • Unlike the nil rate band, any unused part of the £1 million allowance cannot be transferred between spouses.

Impact of renewable generation projects on APR and BPR

Introducing an alternative use for the land, such as a ground mounted solar project, wind farm, and/or energy storage project on agricultural land can remove its eligibility for APR.

Only land used for agricultural purposes qualifies for APR. For example, if land is leased to a renewable energy developer and ceases to be primarily used for agricultural purposes, APR is likely to be refused.

If the renewable energy developers’ activities are integrated into the ongoing agricultural activities e.g. livestock grazing alongside a ground mounted solar project, then with careful planning there may be scope for APR to still apply.

Where APR is not available then BPR may still apply in certain cases.

Whether BPR applies will depend on the nature of the business as a whole and primarily whether the activity of the business is wholly or mainly trade as opposed to passive investment.

“Wholly or mainly” is generally considered to mean that more than 50% of the business is focused on trading activities. The measures that are considered when determining this effectively compare the trading side of the business, to the investment side and if, on the whole, more than 50% is trading, BPR should be available on all assets in the business.

Loss making farming businesses which have diversified into non farming activities risk being viewed as a “hobby farm”, losing BPR. Conversely, a profitable farm where renewable generation and/or energy storage project forms a smaller part of the overall operation, may qualify.

The careful structuring of lease agreements can impact the classification of income and the use of the land to influence its eligibility of APR and BPR.

Other considerations for landowners

For a farmhouse itself to qualify for APR, it must be of a character appropriate to the land being farmed by the occupier. Less land being actively farmed by the owners may have an impact on the APR position of the farmhouse.

A farmhouse that is occupied as a home will not qualify for BPR, even if owned by the business.

Legislative policy and trends

The treatment of APR and BPR in the context of renewable generation and energy storage projects is an evolving area of UK tax policy.

As the government seeks to balance tax revenue with economic growth and renewable energy targets, we could see future changes which could widen the current reliefs. However, this does not appear to be on the immediate horizon.

Conclusion

Whilst renewable energies represent an exciting opportunity for land diversification, they do pose challenges to APR and BPR, which can affect the tax payable by the family on death.

Prior to the 30 October 2024 budget there would have been many instances where landowners would have been advised against having a renewable energy project on their land because of the impact it would have on those reliefs. With those reliefs being reduced from April 2026 it could unlock further land for renewable energy projects.

Integrating renewable energy projects with agricultural use requires the landowner to carry out their own thorough planning with professional guidance from their legal and tax advisors, accountants and valuers to ensure they understand the impact of the proposed diversification in all of the particular circumstances and considers any other steps that may be taken to arrange tax matters efficiently.

This publication is intended for general guidance and represents our understanding of the relevant law and practice as at January 2025. Specific advice should be sought for specific cases. For more information see our terms and conditions.

Date published

16 January 2025

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