Wind energy: target income of up to 8% p.a. plus IHT relief – not guaranteed
Archived article: please remember tax and investment rules and circumstances can change over time. This article reflects our views at the time of publication.
For years, renewable energy projects have 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 asset tax efficiently.
An example is investing in commercial UK wind farms, a collection of commercial wind turbines. However, this is not for everybody. Only experienced or professional investors are eligible. To check if you are, please complete our short elective professional client questionnaire and declaration.
Why wind energy?
Wind turbines operate on a simple principle. The energy in the wind turns two or three propeller-like blades around a rotor. The rotor is connected to the main shaft which generates green, clean electricity, usually to feed into the National Grid.
Onshore wind is the cheapest form of new-build electricity generation available in the UK today. It is also the most prolific renewable source: it provided a record 9.1% of the UK’s electricity last year. At around 5am on 9 August 2019, wind power (both onshore and offshore) was producing 51.48% of the electricity supply, the first time that over half of the UK's electricity was produced by wind.
How could experienced investors benefit?
Attractive income with a degree of inflation proofing
Wind farms can produce relatively predictable annual yields of up to 8% with a substantial degree of inflation protection. Returns are not guaranteed.
This is why income from wind investments is sometimes described as an “annuity-style” income. Whilst not guaranteed, it should be relatively long-term and stable for several reasons:
- The wind farms tend to be already operational, so there’s no construction risk
- Typically, a UK wind farm will receive a significant portion of its revenue from government support schemes which historically have provided fixed index-linked subsidies for 20 years, thereby providing a degree of stability and inflation proofing. The majority of the remaining income will be derived from the sale of electricity and will, therefore, be linked to wholesale electricity prices). It is widely forecast that power prices will increase at a rate beyond inflation, due to a number of factors including growing power demand and constrained supply in the UK – not guaranteed.
- Wind turbine technology is a mature renewable energy technology
- The energy output is predictable and the UK is windy: turbines start to generate electricity at low wind speeds, typically of 7-9mph which in the UK generally happens 75%-85% of the time
- Operating costs are low (c.30% of revenue) – indeed onshore wind is the cheapest form of new-build electricity generation available in the UK today. The first mass-produced wind turbines have been operational since 1980
- The investment is asset-backed
In addition, whatever happens to the stock market or the economy, the wind will still blow, wind farms should still produce and sell electricity, not to mention receive government subsidies if they’re entitled to them. Wind energy is uncorrelated to equities and other assets likely to be held in investors’ portfolios, so could provide diversification.
Wind energy investments can have advantageous tax treatment.
Firstly, depending on how the investment is set up, it could qualify for Business Property Relief (BPR), meaning after two years it should be IHT free.
In addition, and again 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 wind energy 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. Note, however, these are very illiquid investments and you should not invest money you cannot afford to lose.
A benefit of acting sooner
If you’re interested in investing in wind, there could be a benefit to acting sooner. You should be able to benefit from government subsidised, index-linked income for longer.
That’s because the subsidies are for a set period of 20 years and the government stopped granting them to new onshore wind farms in April 2016.
In simple terms, if someone invested today in an onshore wind farm built in 2016, they could benefit from the subsidies for another 17 years. If they delayed their investment by five years, they might only benefit from the subsidies for 12 years – remember government rules are subject to change and depend on individual circumstances.
Wind energy investments are very 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. There is no capital repayment at the end, similar to what happens with an amortising loan. This is because an investor would typically own a share of the assets, i.e. the wind turbines that form the wind installation. These assets have a long but limited economic life, around 25 years, so their value tends to decrease over time. That said, there are projects in the EU that have been operating for longer. Extending the life of wind farms is an active area of research. Repowering existing projects with newer, scaled-up technologies is also an important strategy in the long term.
When an investor sells their shares they should be entitled to their share of any residual value of the assets. If the investor dies, their share of the assets should qualify for BPR.
Investments of this kind are not typically covered by the Financial Compensation Scheme. The value of your investment could fall as well as rise: your capital is at risk. For instance, energy prices might collapse, or the wind energy market might change.
What could you consider next?
There are limited new wind energy investment opportunities. Even fewer 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, and apply to become an elective professional client of Wealth Club.
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 elective professional client questionnaire and declaration.
An offer for a wind energy fund is currently open and it’s already at 50% capacity. Could you qualify?
Wealth Club aims to make it easier for experienced investors to find information on – and apply for – tax-efficient investments. You should base your investment decision on the provider's documents and ensure you have read and fully understand them before investing. This review is a marketing communication. It is not advice or a personal or research recommendation to buy the investment mentioned. It does not satisfy legal requirements promoting investment research independence and is thus not subject to prohibitions on dealing ahead of its dissemination.
Are you eligible?
Just complete our short questionnaire to find out and get access to details of any wind energy investment offers.Check if you are eligible in minutes