Solar: 6.6% to 10.1% p.a. inflation-proof income – not guaranteed – plus IHT relief

For years, solar has been a popular investment amongst institutional investors – from insurers and pension funds to family offices – as well as VCT and EIS investors.

Whilst no longer permitted as a new EIS or VCT investment, some experienced individual investors could still access this type of investment tax efficiently.

To clarify, by solar investments we mean investing – directly or through a fund – in a portfolio of solar farms: large-scale installations of solar photovoltaic (PV) panels to generate green, clean electricity, usually to feed into the National Grid. 

Attractive income with a degree of inflation proofing

Solar parks can produce relatively predictable yields of between 6.6% and 10.1%, with a substantial degree of inflation protection. Returns are not guaranteed.

This is why income from solar investments is sometimes described as an “annuity-style” income. 

Whilst not guaranteed, it should be relatively long-term and stable for several reasons:

  • The solar parks tend to be already operational, so there’s no construction risk
  • Typically, a UK solar PV site will receive a significant portion of its revenue from government support schemes which provide fixed index-linked subsidies for 20 years, thereby providing a degree of stability and inflation proofing  
  • The technology used is simple, proven and established. The source of energy, the sun, is infinite, so there are low operational risks
  • The volatility of the output is low, i.e. the level of electricity produced by a given solar park tends to be stable over time 
  • Operating costs are low (typically less than 25% of revenues), so around 75% of revenues should be available for distributions to investors

In addition, whatever happens to the stock market or the economy, the sun will still shine, solar parks will still produce and sell electricity, not to mention receive government subsidies if they’re entitled to them. Solar is uncorrelated to equities and other assets likely to be held in investors’ portfolios, so could provide diversification. 

Highly tax efficient

Another attractive feature of solar investments is the advantageous tax treatment. 

Firstly, the investment could qualify for Business Property Relief (BPR), meaning after two years it should be IHT free. 

In addition, depending on the structure of the investment, the income you receive might be tax free for the first few years.  

Please remember though tax rules can change and benefits depend on circumstances. 

The combination of attractive and relatively predictable income with the tax reliefs, could make solar investments an appealing option for experienced investors, especially those approaching retirement, or retired already, and concerned about generating income and/or a potential IHT liability. 

The benefit of acting sooner

The earlier you invest, the longer you should be able to benefit from government subsidised, index-linked income. 

That’s because the subsidies are for a set period of 20 years and the government stopped granting them to new solar farms in April 2016. 

In simple terms, if someone invested today in a solar farm built in 2016, they could benefit from the subsidies for another 18 years. If they delayed their investment by five years, they might only benefit from the subsidies for 13 years.    

Source: Department for Business, Energy & Industrial Strategy, July 2018. The UK has experienced rapid growth in solar PV, benefitting from falling module prices and attractive 20 year index-linked subsidies.

Important considerations

Solar investments are illiquid and should be held for the long term. They are for experienced investors only, who should not invest money they cannot afford to lose.

The vast majority of any investment returns is in the form of income, namely regular cash distributions. Similar to what happens with an amortising loan, there is no capital repayment at the end.

This is because an investor would typically own a share of the assets, i.e. the panels, inverters, mounting structure, and electrical wiring that form the solar installation. These assets have a long but limited economic life, around 25 years, so their value tends to decrease over time. 

When an investor sells their shares the investor should be entitled to their share of any residual value of the assets, which after 25 years might be modest, although active managers seek to provide residual value by extending land leases and planning consents. If the investor dies, their share of the assets should qualify for BPR.

That said, an IRR of circa 6 to 7% should be achievable, albeit not guaranteed. 

What could you consider next?

There are limited new solar investment opportunities. Even fewer that are structured in a way we believe is advantageous to investors, and investors need to answer a few questions about their knowledge and experience to access them. 

If the prospect of largely inflation-proof income appeals to you and you're happy with the long-term nature and risks of such an investment, please complete our short questionnaire to find out if you are eligible.

Please note the minimum subscription for this kind of investment is around £100,000.

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