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Darling Expected To Close Shariah Finance Loophole

by Robert Lee, Tax-News.com, London

07 March 2008


The UK government will reportedly move next week to close a loophole that allows commercial property developers to avoid paying stamp duty by using Islamic finance mechanisms to structure their deals.

The Times newspaper reported on Wednesday that Chancellor of the Exchequer, Alistair Darling will use his maiden budget speech on March 14th to correct the 'loophole' after discovering that developers have escaped more than GBP1 billion in stamp duty, charged at 4%, over the last four years.

The loophole arose when the government changed the law in 2005 to rectify an anomaly that meant homeowners using Shariah mortgages to finances a house purchase effectively paid stamp duty twice on the transaction. But, in doing so, it opened up a loophole that commercial developers have been quick to exploit, the Times revealed.

Shariah law prevents the charging of interest, thus ruling out the use of conventional mortgages for Shariah-financed property purchases. To get around this problem, Islamic financiers have developed a system whereby the bank purchases the property on behalf of the buyer and leases it back, usually over a period of 25 years, with the property buyer eventually taking ownership having paid a pre-agreed sum higher than the original purchase price paid by the bank.

However, according to the Times, commercial property investors have discovered that they can circumvent stamp duty by using Islamic finance if the bank includes an option for the original seller to buy back the property, which means that there has been no transfer of land for tax purposes, and therefore no stamp duty is due.

The paper did not reveal how it had come by the information that Darling will close the loophole in the upcoming budget, but it quoted an HM Revenue & Customs spokesperson as stating that "the tax system is constantly kept under review to ensure legislation is operating as Parliament intended".


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