The government is facing increasing pressure to achieve its legally binding target of net zero by 2050. There are specific sectoral targets for 2030, such as the decarbonisation of the UK’s electricity supply. With only five years remaining, this ambitious goal is driving the government to allocate funding for a range of projects designed to accelerate progress. The announcement of the onshore wind strategy is a concrete example of these efforts. It demonstrates a significant policy shift, ending a long-standing ban on onshore wind projects and signalling the government’s commitment to expanding renewable energy options.
Farm diversification into renewable energy projects can form an important part of the solution to this challenge, but while these projects support sustainability and national net zero objectives, they can also introduce tax and business structuring considerations that need to be managed carefully.
Renewable Energy as a Separate Trade
When a farm starts generating electricity from solar panels or wind turbines, this activity may be considered a separate trade. HMRC generally treats ventures involving the Smart Export Guarantee (SEG)—the current scheme for selling electricity to the grid—as trading activities, subject to income tax or corporation tax, depending on the business structure. Previous schemes such as Feed-in Tariffs (FITs) and the Renewable Heat Incentive (RHI) have been closed to new applicants for several years, albeit many farms have ongoing FIT and RHI schemes, and the tax treatment is the same.
However, if renewable energy activities are not integrated into the core farming business, they must be accounted for separately. This affects both the taxation of income and the allocation of expenses - and whether SEG income can be part of the farming trade depends on several factors such as functional integration, scale and dominance, purpose and profit motive and use of assets and labour.
When a farm’s renewable energy activities are considered a separate trade from its core farming operations, it is crucial to keep careful records of the costs linked to each income stream. For example, expenses like cleaning solar panels, annual servicing, and routine maintenance should be tracked specifically making it much easier to review and justify expense allocations in the future, ensuring compliance as well as accurate assessment of the profitability of both the farming and the diversified activities.
Capital Allowances
When a farm invests in renewable energy equipment, it can claim tax relief on the cost of that equipment through capital allowances. However, there are some important restrictions:
Inheritance Tax and Business Relief Risks
Diversification into renewables can affect inheritance tax (IHT) planning. Agricultural Property Relief (APR) and Business Property Relief (BPR) are valuable for mitigating inheritance tax (IHT), but eligibility depends on the land being used for agricultural or trading purposes. If land is taken out of agricultural production for renewable installations, APR may be lost. BPR may still apply if the renewable activity is part of a broader trading business, but this must be supported by evidence such as turnover, capital value, and time spent. And of course, major reforms to APR and BPR are due from April 2026.
Conclusion
As farms diversify, correctly identifying and allocating taxable expenditure for renewable energy ventures is essential for compliance, tax efficiency, and long-term financial planning. It is important to stay up to date with changes in government policy and tax relief schemes, as these can affect both the profitability and tax treatment of renewable energy projects.
To discuss this in further detail, please speak with one of our Farms and Estates experts here.
