Renewable projects help reduce tax bills

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Renewable projects help reduce farmers tax bills

July 2011

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The environment isn’t the only beneficiary when it comes to renewable projects. Many farmers find that, with the right advice, their tax bills can also reap significant benefits.

Mark Newton, head of the renewable team at Fisher German, notes: “In the current profitable arable sector, there are a number of medium to larger scale farmers who are paying 40–50 per cent tax. However, by correctly structuring the build of a renewable project, farmers should find themselves paying less income tax.”

There are a number of ways of organising the development of renewable projects to benefit from tax breaks. Mark advises that farmers should consider the following options.
 
Building the project

The current tax year is the last when annual investment allowance (AIA) is available at 100 per cent on the first £100,000 of building the project and writing down allowances at 20 per cent.
If a farmer has already spent £100,000 on machinery, this AIA is not available.
However, if it has not been used up on machinery purchases and if the farmer is a 50 per cent tax payer,then the annual return on the project of,for example, 15 per cent will then increase to 30 per cent with the 50 per cent saving in tax on the build cost.
 
Income tax
 
Larger scale farmers are likely to pay up to 40–50 per cent income tax on the profit of the renewable project. As earned income the project should qualify for 100 per cent tax relief if it is paid into a farmer’s self invested pension policy (SIPP). However,it is important to remember that there is now a ceiling of £50,000 per annum, and a limit of £1.5m on the total value of the SIPP. Therefore, if the annual income of the renewable project is higher than £50,000 per annum, the project could be put in the names of several members of the farming family which would keep them all below the annual contribution of £50,000.
 
It is also possible, but more complicated, to have the project within the SIPP so the income then rolls up tax free. However, the VAT will not be refundable when the project is built, and it will also be subject to inheritance tax. If an individual owner undertakes a renewable project on his own private house, such as photovoltaic (PV), then the feed-in-tariff (FIT) income should be free of income tax. Therefore, for higher rate tax payers, this option is more attractive and can double the return for a 50 per cent tax payer.
 
Corporation tax
 
Alternatively, a farmer can shelter the project within a company and pay only 20 per cent corporation tax on profits up to £300,000.
 
However, when individuals decide to withdraw profits out of the company, they will need to pay additional income tax on the dividends.
 
Inheritance tax (IHT)
 
Many farmers will have diversified projects on their farms which are non agricultural. Common examples include let cottages or farm buildings that have been converted to offices. These properties may not qualify for 100 per cent agricultural property IHT relief and the tax payable on these assets at death is currently 40 per cent.
 
If the farmer wants a wind turbine that costs £500,000,then he should borrow the £500,000 against these non agricultural assets to build it, thereby reducing the IHT on these assets by this amount.
After two years of running the wind turbine project himself, it should then qualify for 100 per cent business property relief. So a project costing £500,000 would save 40 per cent = £200,000 in IHT, which is a very good form of tax planning for older farmers.
 
Mark advises: “All farmers have different financial situations and should take tax advice from their accountants. There are lots of good tax planning ideas for renewable projects, but in the case of the AIA the project needs to be built in the next 12 months, before the 100 per cent tax relief is lost. Time is of the essence.”
 
For further information, please contact Mark Newton in 01858 410200 or email mark.newton@fishergerman.co.uk
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