In depth

hat tip-Creeping Shariah Blog

Islamic stamp levy loophole closed

By David Oakley, Capital Markets Correspondent

Published: March 13 2008 02:00 | Last updated: March 13 2008 02:00

A loophole allowing commercial property investors to avoid paying stamp duty on an estimated £1bn of deals was closed in the Budget on Wednesday.Rules on office sales using Islamic financing, structured to avoid paying interest in line with strict religious laws, were tightened as a growing number of investors escaped stamp duty by taking advantage of an anomaly in legislation.In a Sharia-compliant property deal, the bank buys the property from the seller, rather than simply providing finance for the buyer to own the property directly.The person buying the property rents it back from the bank, eventually buying the property from the bank for a pre-arranged price higher than the original sale. This is similar to paying a conventional mortgage, except rent is paid rather than interest, therefore complying with the Koran.

Commercial property investors were able to exploit changes to the stamp duty regime in 2005, which were designed to end the anomaly of homeowners who used this form of finance from paying stamp duty twice.

Under the old legislation, the homeowner had to pay stamp duty when the bank bought the property from the seller and then again when they finally bought it back from the bank at the end of the leasing period, typically 25 years or similar to a conventional mortgage.

However, laws correcting this in the 2005 Budget created a new anomaly by allowing commercial property developers to escape stamp duty entirely. An estimated £1bn of deals have used this loophole.

Property investors avoided paying the tax by including an option for the original seller to buy back the property. This meant there was, in effect, no sale and so no need to pay stamp duty.

Under legislation announced yesterday, the buyer will have to pay stamp duty, even if an option does not technically create a sale.

Property developers, who had used this quirk in the law, were not using Islamic finance for religious reasons, but to avoid tax.

Separately, the government announced it would update progress on plans to issue the first western sukuk , or Islamic bond, in the summer. Should the UK issue a Sharia-compliant bond, it would enhance London’s position as the leading centre outside the Muslim world for Islamic finance.

The government said it was considering launching a sukuk last April in the hope of reinforcing London’s financial pre-eminence and to build bridges to the Muslim community.

 

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