Rent from a solar farm lease is property income, taxed separately from any farming profits even if you farm the rest of the holding. While the fields are covered by panels and occupied by the operator they are unlikely to be occupied for agriculture, so agricultural property relief is at risk, business relief is unlikely, and a later sale of those fields is unlikely to qualify for Business Asset Disposal Relief.

How is the rent from a solar lease taxed?

A solar developer normally takes a long lease of the fields and pays an annual rent. Income from exploiting an interest in or right over property in the UK is part of a UK property business under sections 264 and 266 of the Income Tax (Trading and Other Income) Act 2005 (ITTOIA). Section 266 expressly includes payments for a licence to occupy or otherwise use property, so it does not matter whether the agreement is drafted as a lease or a licence.

HMRC’s Business Income Manual at BIM55060 says that where farm ground is let for 365 days or more, the tenant is normally the occupier, and the landlord is taxed on the rent as property income. That remains the case even where the landlord is farming other fields at the same time, following Bennion v Roper. The rent therefore goes on the property pages of the tax return, not in the farm accounts. It cannot be averaged with farming profits, and it is pooled with your other UK lettings as one property business (PIM1020).

Expenses are deductible against the rent if they are wholly and exclusively for the letting and not capital, such as legal fees on rent reviews or the cost of agents managing the lease. Fees for granting a long lease are a different matter; see legal and professional fees for landlords.

Does solar rent bring me into Making Tax Digital?

Property income counts towards qualifying income for Making Tax Digital for Income Tax. GOV.UK says sole traders and landlords with qualifying income over £50,000 in 2024 to 2025 should have started from 6 April 2026, those over £30,000 in 2025 to 2026 start from 6 April 2027, and those over £20,000 in 2026 to 2027 start from 6 April 2028. A large solar rent can bring a farmer in sooner than expected. See MTD for Income Tax thresholds.

How are option fees and lump sums taxed?

Developers often pay an option fee while they seek planning permission and a grid connection, with the lease granted later if the scheme goes ahead. Under section 144 of the Taxation of Chargeable Gains Act 1992 (TCGA), the grant of an option is itself a disposal for capital gains tax. If the option is later exercised, the grant of the option and the transaction that follows are treated as a single transaction. Our guide to options and capital gains covers the computation.

If the operator pays a premium for the grant of a lease of 50 years or less, part of the premium is taxed as property income in the year the lease is granted. HMRC’s PIM1205 gives the formula: the premium multiplied by (50 minus Y) divided by 50, where Y is the number of complete years of the lease other than the first. The rest is a part disposal for capital gains tax. See lease premiums.

Is VAT charged on solar rent?

VAT Notice 742 says the grant of an interest in, right over or licence to occupy property is normally exempt from VAT. A farmer who is VAT registered and has not opted to tax the fields will therefore treat the rent as exempt income, which can restrict recovery of input VAT on related costs. If the farmer has opted to tax, or chooses to, VAT is charged on the rent. The notice also treats the grant of a right to buy an interest in property (a call option) as a supply with the same liability as the property itself.

Will the fields still qualify for agricultural property relief?

Agricultural property relief under the Inheritance Tax Act 1984 applies to agricultural property, defined in section 115(2) as farmland or pasture together with farmhouses, cottages and farm buildings of a character appropriate to the property. Section 117 adds an occupation test: the owner must have occupied the property for the purposes of agriculture for the two years before the transfer, or owned it for seven years during which it was occupied for agriculture by the owner or someone else.

HMRC’s Inheritance Tax Manual at IHTM24061 lists the uses accepted as agricultural, such as growing food and keeping livestock to produce food. IHTM24062 says that ground principally used for other purposes does not qualify even though there may be occasional agricultural use. Fields let to an operator to generate electricity are occupied by the operator for that purpose, so it is hard to see how they meet section 117 during the lease, even if sheep graze between the rows. Expect close scrutiny of any claim.

Two further effects are easy to miss:

  • The occupation clock restarts. Section 117 looks at the period ending with the date of the transfer. When the lease ends and farming resumes, the two year (or seven year) period has to be built up again before relief is due.
  • The farmhouse can suffer. A farmhouse qualifies only if it is of a character appropriate to the property (IHTM24050), judged as a matter of fact and degree. If a large part of the holding is under panels, the house is being compared with a smaller farmed area.

Relief is also limited to agricultural value, defined in section 115(3) as the value if the property could only ever be used as agricultural property. Any extra value from the solar income or development potential is outside agricultural property relief in any case. From 6 April 2026, 100% relief on combined agricultural and business property is capped by a £2.5 million allowance per individual, with 50% relief above it (IHTM25510). See agricultural property relief and the relief allowance.

Can business relief cover the solar fields instead?

Usually not on their own. Section 105(3) of the Inheritance Tax Act 1984 denies business relief where a business consists wholly or mainly of making or holding investments (IHTM25261). HMRC’s IHTM25280 asks caseworkers to consider whether other ways of exploiting ownership of property are investment activities, and receiving a fixed rent from an energy operator with little or no service provided looks firmly at the investment end of that spectrum.

The picture is different where the solar fields are a small part of a genuinely farming business. In Farmer v IRC (IHTM25265), a single business of farming and letting surplus properties was looked at in the round, considering capital employed, time spent, turnover and profit, and was held to be mainly farming. A farm with a modest solar lease may still pass that test. A holding where most of the ground and most of the profit comes from the solar rent is unlikely to. See business relief compared with agricultural relief.

How does the lease affect Business Asset Disposal Relief?

Business Asset Disposal Relief (BADR) charges qualifying gains at 18% on disposals from 6 April 2026, according to GOV.UK. It needs a disposal of the whole or part of a trading business, or of assets that were in use in a business at the time it ceased and are sold within three years of cessation (CG63975). HMRC’s example at CG63980 confirms that straightforward letting of property is not a trade.

Fields let to a solar operator are not being used in the farming trade. A sale of the freehold subject to the lease is therefore unlikely to qualify on its own, and if the farmer later sells the farm as a going concern, the gain on the let fields is unlikely to form part of the qualifying disposal. If farming ceases while the fields are under lease, they were not in use for the trade at cessation. Our page on BADR on farm sales explains the part disposal problem in more detail.

How might this look on a real farm?

Illustration only. Jane farms 200 acres as a sole trader. She grants a 35 year lease of 40 acres to a solar company at £40,000 a year, after receiving an option fee two years earlier.

  • The £40,000 is property income each year, reported separately from her farm profits.
  • The option fee was a capital gains tax disposal in the year it was granted, and is treated as part of the larger transaction once the lease is granted.
  • If Jane dies during the lease, agricultural property relief is likely to be available on the 160 acres she farms, but not on the 40 acres under panels. Business relief on those 40 acres depends on whether her business as a whole is still mainly farming.
  • If she retires and sells the farm, the 40 let acres are unlikely to attract BADR.

What mistakes come up most often?

  • Putting solar rent in the farm accounts as trading income, which also distorts farming loss claims and averaging.
  • Assuming agricultural property relief continues because sheep still graze under the panels.
  • Ignoring an option fee as a disposal because the lease had not yet been signed.
  • Not reviewing wills and succession plans before signing.

If HMRC opens a check into your return, tax investigation insurance pays your accountant’s fees. Solar Protect cover pays up to £100,000 with no excess; it never pays tax, interest or penalties. Read how our cover works or get a quote.

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Sources

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 19 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.