If you were signing a lease (as tenant) and the rent is to increase annually in line with inflation, would you rather link it to CPI or RPI? 

This is what I asked in my most recent LinkedIn poll and the results are in:

- CPI: 67%

- RPI: 33%

It was neck and neck for quite some time, before CPI made a decisive victory. I can't be certain what each of my respondents considered when voting, but here are the points which occurred to me:

Goodbye RPI

Rishi Sunak announced in 2020, when he was Chancellor, that the Government would not consent to bring RPI into line with CPI or CPIH before 2030. Of course there is (at least one) General Election due before then, but the direction of travel is clear - RPI is on its way out.

This may be seen as a reason not to use this index, but well drafted real estate documents will provide for RPI to be substituted with a suitable alternative index if RPI stops being published, so this shouldn't be a material factor.

WIN FOR: CPI (just)

Level of Rent

While I can't predict what inflation will be, historically RPI has consistently tracked higher than CPI. Below are the figures for the last 10 years, published by the ONS:

If our lease was granted for a term of 10 years in 2012 (conveniently avoiding the spike in inflation in 2022) and with a starting rent of £1,000,000 exclusive, then linking to RPI rather than CPI would result in nearly £95,000 of additional rent being paid over the term. Ouch.

WIN FOR: CPI 

SDLT

Where rent is linked to CPI, this is classed as 'variable' for the purposes of calculating SDLT. By contrast rental increases linked solely to RPI are disregarded for SDLT purposes. This means that linking rental increases in the first 5 years to CPI have a number of draw backs:

1. the SDLT submission must be made on a "reasonable estimate" basis. This may mean you need to take professional advice to provide an estimate that you can justify as reasonable 
2. the SDLT you pay will inevitably be higher, as the rent will include the estimated inflationary increases - for example, the difference in SDLT on a 10 year lease with a rent of £1,000,000 exclusive, where the rent increases annually at 3% compound, will cost nearly £18,000 extra 
3. the process for submission is much more onerous, because unlike with a standard return, it is a two (or potentially three) stage process: 
   • Return 1: as normal, but on reasonable estimate basis
   • Return 2: required to be submitted after five years to correct the estimate with the actual figures 
   • Return 3: if the index for the fifth years' CPI is not available when submitting Return 2, you must submit Return 2 using the actual rent paid for years 1-4 and a reasonable estimate of the year 5 rent, and then a third return is required when the final years' CPI figures are published and the year 5 rent becomes certain

Sorry Adam Hart-David, you got it wrong, tax really is taxing. But what does this mean? 

• Additional legal costs: this really is specialist stuff and not something the inexperienced should dabble in 
• Late payment interest: even though you could never have paid the correct amount, as it was unknowable, HMRC still want to be paid interest on any shortfall, currently at 6.5% (but don't worry if you've paid too much as HMRC will pay you interest on the over-payment ... at 3%)
• The risk of forgetting / getting it wrong, with the associated penalties and reputational damage

WIN FOR: RPI 

There isn't a right and wrong answer, but there is a lot to think about. If you need support on your next lease or complex SDLT issues, please feel free to get in touch with Forsters' Corporate Occupier team for a chat.