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CPI -v- RPI linked rent reviews – What impact does this have on SDLT?

What is the Retail Price Index (RPI)?
The RPI is a measure of inflation, which in turn is the rate at which prices for goods and services are rising.

What is the Consumer Prices Index (CPI)?
The CPI is the speed at which the prices of the goods and services bought by households rise and fall.

What is Stamp Duty Land Tax (SDLT)?
Stamp Duty Land Tax is a tax that you must pay if you buy a property or land above a certain price in England and Northern Ireland. This applies when buying a property which is either a freehold property, a new or existing leasehold property and on the grant of some leases.

SDLT implications of using the RPI for rent reviews
For the purpose of SDLT, any rent increases within the first 5 years of the term based solely on RPI are normally excluded from any SDLT implications.

SDLT implications of using the CPI
HMRC do not disregards the effects of other index linked rent reviews that take place in the first 5 years of a lease, therefore if there is a rent review carried out within the first five years of the term using a CPI linked review (or any other indexing method but not RPI), then additional SDLT might be payable and if so, a further SDLT return would need to be submitted to HM Revenue & Customs.

Practical Perspective

When a lease is completed (and subject to the SDLT threshold), SDLT will be payable. The rent payable in the first five years is used to calculate the SDLT liability and the highest rental figure in that 5-year period is taken to be the rent for the rest of the term of the lease. One particular advantage to the tenant of linking rent reviews to the RPI is that if there are any rent reviews within the first 5 years of the term, HMRC disregards the effects of rent increases due to RPI and therefore no further SDLT will be payable by the tenant if the rent under the lease increases due to an RPI linked rent review.

However, if the method of rent review is linked to another index such as CPI, and the rent will reviewed  within the first 5 years of the term, then this might have SDLT implications and could lead to additional monies which will need to be paid. The landlord might find they encounter resistance from the tenant if they decide to go down this route.