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UK Continues To Level Playing Field For Islamic Finance

by Robin Pilgrim, LawAndTax-News.com, London

14 December 2009


The UK government has continued to level the playing field for Islamic finance by including measures in the recent pre-budget report that will equalize the tax treatment of property refinancing transactions.

Commenting on the changes, Mohammed Amin, UK Islamic finance leader, PricewaterhouseCoopers LLP, said that Britain's position as a leader in the Islamic finance industry has been strengthened further.

"Over several years, the UK has become the leading Western country in Islamic finance by taking a series of measures to ensure that Islamic finance is taxed no worse, and no better, than conventional finance. The pre-Budget report continues this progress by including measures to equalize the tax treatment of property refinancing transactions," he observed, adding:

"After extended consultations with the industry, the Government has announced that, subject to appropriate safeguards, a sale for the purposes of refinancing in accordance with the tax rules governing Islamic finance will not give rise to a taxable disposal for capital gains tax purposes."

"While the relevant legislation exists to facilitate Islamic finance, it is neutral regarding religion. It applies to transactions by all citizens which fall within the tax rules, regardless of the religion of the taxpayer or whether the bank is an Islamic bank or is a conventional bank."

The proposals will make it possible for Muslims who own property (normally investment property or real estate used for a business) which has appreciated in value to obtain additional bank finance in a Shariah compliant way, using the property as collateral. Prior to the change, such refinancing often faced prohibitive tax costs.

Conventional refinancing typically involves taking on extra borrowing when a property has increased in value since its original purchase. Such extra borrowing does not give rise to any capital gains tax issues, since for tax purposes the property continues to be held by the owner, even if it is mortgaged to the lending bank.

Islamic refinancing cannot be done in the above manner. Instead, it typically involves the property being sold to the "lending" bank and then rented back. The bank’s customer will also be obliged to buy the property back eventually, to repay the financing. However, under current tax law the sale to the bank is a disposal for capital gains tax purposes, giving rise to capital gains tax if the property is worth more than the owner paid for it. (Principal private residences are an exception as gains on them are exempt.)


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