The Chancellor is expected next week to close a loophole in Sharia finance rules that have allowed commercial property investors to avoid paying stamp duty on more than £1 billion of deals, The Times has learnt.

Alistair Darling is expected to tighten the rules on mortgages that comply with Sharia – or Islamic law – in his inaugural Budget after commercial property developers discovered a quirk in the legislation that allowed them to escape stamp duty. The Government brought in changes to the stamp duty regime three years ago amid concern that homeowners opting for Sharia-compliant mortgages were paying stamp duty twice.

The 2005 Budget brought in measures to correct this anomaly but inadvertently created a tax avoidance opportunity that property developers have rushed to exploit. More than £1 billion of commercial property deals over the past two years have escaped stamp duty at 4 per cent.

Peter Beckett, the tax director for Ernst & Young, said: “This loophole has existed since 2005 but has been used more widely following the closure of previous stamp duty tax planning schemes.”

Senior City tax lawyers, commercial property agents and a head of asset finance for one of Britain’s largest banks said that increasing numbers of office sales worth £50 million to £100 million or more have been structured using the latest Sharia-compliant financing to take advantage of the loophole. Those buying and selling the properties come from all religious backgrounds and many have no cultural imperatives to use Sharia.

Sharia prevents Muslims from charging or paying interest. Under Sharia-compliant property finance deals, the bank buys the property from the seller, rather than simply providing finance for the buyer to own the property directly.

The buyer then rents the property back from the bank for, typically, 25 years – equivalent to the term in a conventional mortgage – eventually buying the property from the bank for a prearranged price higher than the original sale.

Before changes to stamp duty regulations, Sharia-compliant property deals would have attracted stamp duty twice for home sales and three times for commercial building sales because stamp duty is payable on commercial leases. The changes should have meant that stamp duty was payable only once, in line with conventional mortgages. Commercial property investors have discovered a loophole under which the bank includes an option for the original seller to buy back the property. This technical detail means that, for tax purposes, there has been no transfer of land and, therefore, no stamp duty falls due.

The emergence of the loophole comes only weeks after the Ministry of Defence completed the sale of Chelsea Barracks to Project Blue Guernsey, a company owned by Qatar and an offshore vehicle controlled by Christian Candy, a British luxury-flats developer, in a £959 million deal. Chelsea Barracks is being managed by Candy & Candy, a firm of designers owned by Mr Candy and his brother Nick.

Nick Candy declined to comment on the stamp duty aspects of Chelsea Barracks. He said: “We are under strict confidentiality with the banks and our partners on the deal. Project Blue Guernsey can’t comment.”

One senior City property agent, who said that he had been involved in four London office sales over the past six months, each worth more than £100 million and using Sharia-compliant deals, said: “There has definitely been over a billion pounds’ worth of deals – it is only worth doing on the larger deals. There is nothing illegal but it has only become fashionable over the past six months.”

The Treasury said: “The tax system is constantly kept under review to ensure legislation is operating as Parliament intended. Where evidence is found that it isn’t, the Government will move quickly to close loopholes.