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Islamic Compliance


QUESTION: How can I ensure my property arrangements are complaint with Islamic Law?

Muslims are prohibited from taking standard mortgages to help them buy a property because they involve paying interest, a concept not compliant with Sharia (Islamic Law).

The Islamic system comprises various methods of purchasing property with the assistance of financial institutions by way of title or financing structures not contrary to Sharia.

The most common are Murabahah and Ijara.

Murabahaha involves a bank taking the title to a property and selling it or agreeing to sell it to a customer in return for deferred payments. These would be sufficient to cover the purchase price and acquisition costs, as well as an amount equivalent to the interest that would have been charged had the customer borrowed money from the bank to buy the property.

Ijara involves an arrangement whereby the title to the property is taken by the bank or a third party, which then leases the property to the customer. The rent payable under the lease would be an amount equivalent to the interest that would have been charged if funds had been borrowed to acquire the property.

But there can be problems with additional tax on top of that which would be incurred on a straightforward purchase, as a result of the extra sale or lease transactions involved.

The government has introduced legislation to prevent additional Stamp Duty Land Tax arising, subject to certain conditions. These include a requirement that the transaction is between an individual and a financial institution, so the legislation is really aimed at the housing market.

For transactions outside the legislation’s scope, particularly in commercial property, careful tax planning is required.

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