A change in practice by the Stamp Office in its approach to calculation of stamp duty on new leases which contain provision for future rent increases in line with RPI (retail prices index) changes has resulted in the Law Society's revenue law committee receiving a number of inquiries from solicitors.The Stamp Office is relying upon the decision in LM Tenancies plc v IRC [1996] STC 880 to apply the contingency principle to rent reserved under a lease so that stamp duty is calculated by reference to RPI changes in the year ending with the date of execution of the lease.

This approach has led to some excessive estimates of liability.The revenue law committee has taken up the issue with the Stamp Office and has made two main points.

Firstly, it does not consider that the new approach is justified.

LM Tenancies was concerned with stamp duty avoidance; to apply the decision in that case across the board to any lease with a rent review clause linked to the RPI is unjustified.

Secondly, this is an extremely important change in practice which the Stamp Office has not apparently published effectively.In response, the Stamp Office has assured the committee that it will examine the facts of each case and give careful consideration to the application of the LM Tenancies decision.The Stamp Office points out that a public announcement of the new practice was made in Hansard in a reply given by the Economic Secretary to the Treasury to a parliamentary written question asked by a Conservative MP.

It followed representations from the House Builders Federation, the Manufacturing and Construction Industries Alliance and individual property owners.This reply states: 'Stamp duty is charged on the grant of a new lease of property by reference to the premium paid for the lease and the average annual rent.

Duty on the premium is charged at 1% but there is no charge on the premium where the premium is £60,000 or less and the average annual rent is £6000 or less.

Duty is charged on the average annual rent by reference to a sliding scale of rates which depend on the length of the lease.

For example, for a lease of over 100 years, the rate is 24% (£12 per £50 or part of £50 of the average annual rent).'Where an existing lease is sold by the leaseholder to someone else, duty is charged at 1% on the price paid, in the same way as with the sale of a freehold.

No duty is charged on the rent.

I have received representations from the House Builders Federation, the Manufacturing and Construction Industries Alliance, and McCarthy and Stone about the treatment of a grant of a new lease under which the rent is to be adjusted in future in line with RPI changes.'Where the terms of a lease lay down specific figures for future rent payments, or provide for the rent to be increased by a fixed percentage each year, there is no difficulty in calculating what the average annual rent is for the purpose of the stamp duty charge.

The calculation is more difficult where the rent is to depend on the future movement of an index such as the RPI.

Decisions of the courts, including the recent case LM Tenancies plc v Inland Revenue Commissioners, have given some guidance on the calculation of the charge to duty where an element is not ascertainable at the outset.'The Inland Revenue has reviewed its practice on the stamp duty treatment of leases of this type in the light of representations that have been made.

It accepts that in some cases the calculations made by Stamp Offices produce too hi gh a figure.

'In the LM Tenancies case, the premium paid for a lease was to be calculated by reference to the market price of a Treasury loan stock 25 days after the execution of the lease.

The Court decided that duty should be calculated by reference to the value of the stock at the date of execution of the lease.'The Inland Revenue's view, in the light of the court's decision in LM Tenancies, is that where the rent under a lease is to be adjusted by reference to RPI changes the duty should be calculated by reference to the change in the year ending with the date of execution of the lease.

The precise method of adjustment may depend on the terms of the lease and on the way they provide for the calculation to be made.

For example, whether the rent is to be increased annually or only at longer intervals.

Generally, where the adjustment is to be made by comparing the value of the RPI at different dates, the difference between the two values over the latest year will be used to measure the rent increase for stamp duty purposes.For example, if the initial rent is £300 a year and is to be adjusted annually, and the RPI has gone up from 150 to 153, equivalent to 2% over the relevant 12-month period, it would be assumed that the rent would go up by £6 (2% of £300) each year.

Thus, the rent would be taken as £306 in the second year, £312 in the third year, and so on, in order to calculate the average annual rent under the lease.'The Inland Revenue is issuing instructions to Stamp Offices accordingly, to ensure that individual cases are dealt with on a consistent basis.

A taxpayer who disagrees with the Stamp Office's calculation of the duty in a particular case will, of course, have the normal rights of appeal.' One firm of solicitors has already obtained counsel's opinion on this issue, to the effect that the Stamp Office's approach is 'not sustainable'.

If there are any changes in this area the revenue law committee will ensure they are reported as soon as possible.