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lease of land - replanting obligation by windfarm?

When a developer of a wind farm fells trees in order to install its turbines, it is under a legal obligation (part of planning consent) to replant the trees elsewhere. 

Our client (land owner) has been approached by a developer.  The developer will enter into a 10 year lease with the client.  The developer will pay £x per hectare of land.  The developer needs to plant trees so it undertakes to do so on the land.  After 10 years the lease will lapse and the trees will essentially revert to the client.  The developer has no interest in this, it is a pain in the neck for them but it is a stipulation of the planning consent.

We know that income from commercial forest operations is exempt; however the rent from the land would appear to be taxable in the normal manner.

I am concerned that there is an angle for HMRC to say that the developer is making improvements to the asset (land) under the lease and that we may have a deemed premium.  We estimate that the value of 10 year old trees is £3k per hectare.  On that basis of 100 hectares the client would appear to be getting £300k value from this?

Any thoughts?

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It's easy for me to say...

... but I think you're worrying unnecessarily.

The obligation to plant the trees doesn't arise out of the lease.

If I'm your tenant under a short lease, and I choose to improve your property for my own reasons, such that an improved asset reverts to you at the end of the lease, then that's a gratuitous disposition on my part.

If we're unconnected persons and we transacted at arm's length, I can't see that it's anything that makes that anything other than a windfall.

If you dispose of the improved property, then you will have a gain on an appreciated asset without the benefit of the enhancement costs, but that's the worst that can happen in my view.

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By blok
19th Sep 2012 10:20

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thanks steve, I seem to be going through a spell at the moment where I am finding problems rather than solving them !

On this particular point, commercially the land owner would not grant the lease (which is at a fairly low annual rent rate) had it not been for the fact that the tenant will improve the value of the land by planting the trees.

 

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