Tax relief planned for Sharia-compliant deals

Gordon Brown outlined plans in his Budget to clarify the taxation and tax relief possibilities for Sharia-compliant financial products.

Under Islamic law, money cannot accrue interest, in theory prohibiting Western-style investment products.

Islamic finance revolves around the asset – such as property – so taxation is different and must be approached independently of any other UK taxation laws. A measure will be introduced by the Treasury to clarify the taxation of financial securitisations for Islamic mortgages, to take effect from April 1 2007.

Regulations will also be introduced to extend the Community Investment Tax Relief scheme to include Islamic financial products, meaning Muslim borrowers should be able to invest in residential schemes such as real estate investment trusts.

Keith Leach, head of Islamic finance specialists Alburaq, says: “The move to help with community investment and eventually REITs sends out a good signal to Islamic investors.

“The government has recognised that Muslims like property investment as it’s asset based, and rental streams are in line with Sharia law.

“Over the last four Budgets the chancellor has made pronouncements about Islamic finance, so he definitely wants it to be a prominent player in UK financial markets.”

Recently, Alburaq, which is the Sharia mortgage arm of the Arabic Banking Corporation, predicted that the UK Sharia mortgage market could be worth 1bn by 2009. The lender says the UK market is worth just under 500m.

Leach adds: “There will come a time when we have books big enough to securitise, and to do that we must stay within Sharia law, without any worries about penalties from the government.

“We want to see the Islamic financial sector grow, and with consultations like the ones outlined in the Budget things are going to speed up.”