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RPI and SDLT – the silver lining of a flawed measure of inflation

With the Retail Prices Index back in the news again after rail commuters were hit by the biggest annual increase in fares for five years, the debate has resurfaced about whether it is time for the RPI to “RIP”.  The Office for National Statistics has reiterated its assertion that the index is a “flawed” measure of inflation, but has observed that its use remains prevalent in both commercial and public sector contracts.  Legislation compels the ONS to continue producing the RPI while at the same time also publishing its preferred Consumer Prices Index and the new CPIH Index which covers consumer price inflation including owner-occupiers’ housing costs.

Within the commercial real estate arena, index-linked rents remain prevalent in a number of sectors and predominantly the RPI remains the chosen benchmark.  Whilst this has tended to result in higher uplifts having to be borne by tenants, there is at least one small advantage for the tenant: adjusting rent “in line with” RPI can be ignored for SDLT purposes.

The usual rule (subject to an exception for uplifts in the final quarter of the fifth year) is that any increases in rent during the first five years of a lease have to be taken into account when calculating SDLT.  When the increases aren’t known at the time the lease is granted, they have to be estimated, and subsequent returns filed once the actual increases have crystallised.  However, rent adjustments in line with the RPI do not have to be taken into account, and the tenant does not have to pay any additional SDLT in respect of those adjustments.

Points to Note:

(a)  The exception in the legislation refers only to the Retail Prices Index.  If rents are to be adjusted in line with any other index or measure of inflation (for example the CPI), then the exception does not apply.

(b)  The exception only applies where the rent adjustments are “in line with” the RPI. Guidance from HMRC states that the exception will not apply to “RPI plus” or “RPI minus” adjustments.  For example, a rent review mechanism which varies the rent by “RPI plus 1%” would have to be taken into account in the SDLT calculation.

(c)  The guidance does suggest that capped RPI-based adjustments “which are subject to a minimum or maximum restriction” would fall within the exception.  We would exercise caution, however, in seeking to take advantage of this exception – particularly if the adjustment is subject to a collar – given the ambiguous phrasing of the guidance.

(d)  If the RPI-based review is worded so as to be upwards only, the guidance clearly states that this remains allowable within the exception.

(e)  Care should be taken when choosing the months by reference to which the adjustment is made.  The guidance states that, where rent is to be adjusted by reference to the RPI figure for the month up to three months earlier, this is allowable.  By implication, if your reference month is more than three months before the rent review date, then your review clause is no longer “in line with” RPI.